Takeover Law & Pratice 2020
Takeover Law & Pratice 2020
Takeover Law & Pratice 2020
2020
This outline describes certain aspects of the current legal and
economic environment relating to takeovers, including mergers and
acquisitions and tender offers. The outline topics include a discussion of
directors’ fiduciary duties in managing a company’s affairs and
considering major transactions, key aspects of the deal-making process,
mechanisms for protecting a preferred transaction and increasing deal
certainty, advance takeover preparedness and responding to hostile offers,
structural alternatives and cross-border transactions. Particular focus is
placed on recent case law and developments in takeovers. This edition
reflects developments through September 2020.
© October 2020
Wachtell, Lipton, Rosen & Katz
All rights reserved.
Takeover Law and Practice
TABLE OF CONTENTS
Page
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a. Revlon ....................................................... 28
1. When Does Revlon Apply? ........... 29
2. What Constitutes Value
Maximization? .............................. 31
3. What Sort of Sale Process Is
Necessary? .................................... 31
b. Unocal ....................................................... 34
c. Blasius ....................................................... 36
3. Entire Fairness ...................................................... 37
C. Controlling Stockholders, Conflicts and Special
Committees ....................................................................... 38
1. Controlling Stockholders ...................................... 38
2. Transactions Involving Conflicted
Controllers or Differential Consideration ............. 41
3. Effective Special Committees ............................... 42
a. Disinterestedness and Independence
of Committee Members ............................ 43
b. The Committee’s Role and Process .......... 45
c. Selection of the Committee’s
Advisors .................................................... 47
D. Stockholder Approval and Shifting the Standard of
Review .............................................................................. 48
1. Standard-Shifting in Non-Controller
Transactions .......................................................... 48
2. Standard-Shifting in Controlling
Stockholder Transactions ...................................... 51
III. Preliminary Considerations in the M&A Deal-Making Process..........55
A. Preliminary Agreements: Confidentiality
Agreements and Letters of Intent ...................................... 55
1. Confidentiality Agreements .................................. 55
2. Letters of Intent ..................................................... 58
B. Choice of Sale Process: Auctions and Market
Checks ............................................................................... 59
1. Formal Auction ..................................................... 60
2. Market Check ........................................................ 60
a. Pre-Signing Market Check........................ 61
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b. Post-Signing Market Check ...................... 61
c. Go-Shops................................................... 63
C. Board Reliance on Financial Advisors as Experts ............ 63
D. Financial Advisor Conflicts of Interest ............................. 66
1. Identifying and Managing Financial Advisor
Conflicts of Interest............................................... 66
2. Public Disclosure of Financial Advisor
Conflicts of Interest............................................... 68
E. Use and Disclosure of Financial Projections .................... 69
IV. Structural Considerations.....................................................................73
A. Private Deal Structures ..................................................... 73
B. Public Deal Structures....................................................... 76
1. Considerations in Selecting a Merger vs. a
Tender Offer Structure .......................................... 78
a. Speed ......................................................... 78
b. Dissident Shareholders.............................. 79
c. Standard of Review ................................... 79
2. Delaware Facilitates Use of Tender Offers:
Section 251(h) ....................................................... 80
3. Methods of Dealing with Tender Offer
Shortfalls ............................................................... 81
a. Top-Up Options ........................................ 81
b. Dual-Track Structures ............................... 81
c. Subsequent Offering Periods .................... 82
4. Mergers of Equals ................................................. 82
5. Rule 13e-3 “Going Private” Transactions............. 84
C. Cash and Stock Consideration .......................................... 85
1. All-Cash Transactions........................................... 86
2. All-Stock Transactions.......................................... 86
a. Pricing Formulas and Allocation of
Market Risk ............................................... 86
1. Fixed Exchange Ratio ................... 86
2. Fixed Value with Floating
Exchange Ratio; Collars ............... 87
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3. Fixed Exchange Ratio within
Price Collar ................................... 88
b. Walk-Aways ............................................. 89
c. Finding the Appropriate Pricing
Structure for All-Stock Transactions ........ 90
3. Hybrid Transactions: Cash and Stock .................. 90
a. Possible Cash-Stock Combinations .......... 90
b. Allocation and Oversubscription .............. 92
4. Valuing Stock Consideration in Acquisition
Proposals ............................................................... 93
a. Short- and Long-Term Values .................. 94
b. Other Constituencies and Social
Issues ......................................................... 95
c. Low-Vote or No-Vote Stock
Consideration ............................................ 96
5. Contingent Value Rights ....................................... 96
a. Price-Protection CVRs .............................. 96
b. Event-Driven CVRs .................................. 97
6. Federal Income Tax Considerations ..................... 98
a. Direct Merger ............................................ 98
b. Forward Triangular Merger ...................... 99
c. Reverse Triangular Merger ....................... 99
d. Section 351 “Double-Dummy”
Transaction................................................ 99
e. Multi-Step Transaction ........................... 100
f. Spin-Offs Combined with M&A
Transactions ............................................ 100
V. Deal Protection and Deal Certainty ....................................................103
A. Deal Protection Devices: The Acquiror’s Need for
Certainty.......................................................................... 103
1. Break-Up Fees .................................................... 104
2. “No-Shops,” “No-Talks” and “Don’t Ask,
Don’t Waive” Standstills .................................... 106
3. Board Recommendations, Fiduciary Outs
and “Force-the-Vote” Provisions ........................ 108
4. Shareholder Commitments.................................. 109
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5. Information Rights and Matching Rights ........... 111
6. Other Deal Protection Devices............................ 112
a. Issuance of Shares or Options ................. 112
b. Loans and Convertible Loans ................. 113
c. Crown Jewels .......................................... 113
B. Material Adverse Effect Clauses: The Seller’s
Need for Certainty........................................................... 114
C. Committed Deal Structures, Optionality and
Remedies for Failure to Close......................................... 117
VI. Hostile M&A and Advance Takeover Preparedness .........................121
A. Rights Plans or “Poison Pills” ........................................ 121
1. The Basic Design ................................................ 124
2. Basic Case Law Regarding Rights Plans ............ 125
3. “Dead Hand” Pills ............................................... 127
B. Staggered Boards ............................................................ 128
C. Other Defensive Charter and Bylaw Provisions ............. 128
1. Nominations and Shareholder Business.............. 130
2. Meetings.............................................................. 131
3. Vote Required ..................................................... 132
4. Action by Written Consent ................................. 132
5. Board-Adopted Bylaw Amendments .................. 132
6. Forum Selection Provisions ................................ 133
7. Fee-Shifting Bylaws............................................ 134
D. Change-of-Control Employment Arrangements ............. 135
E. “Poison Puts” .................................................................. 137
F. Planning an Unsolicited Offer ........................................ 139
1. Private Versus Public Forms of Approach.......... 139
2. Other Considerations .......................................... 140
3. Disclosure Issues for 13D Filers ......................... 141
G. Responding to an Unsolicited Offer—Preliminary
Considerations................................................................. 141
1. Disclosure of Takeover Approaches and
Preliminary Negotiations .................................... 141
2. Other Considerations .......................................... 143
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H. Defending Against an Unsolicited Offer ........................ 144
1. “Just Say No” ...................................................... 144
2. White Knights and White Squires....................... 145
3. Restructuring Defenses ....................................... 146
4. Making an Acquisition and the “Pac-Man”
Defense ............................................................... 147
5. Corporate Spin-Offs, Split-Offs and Split-
Ups ...................................................................... 148
6. Litigation Defenses ............................................. 148
7. Regulatory and Political Defenses ...................... 149
VII. Cross-Border Transactions ...............................................................151
A. Overview ......................................................................... 151
B. Special Considerations in Cross-Border Deals ............... 151
1. Political and Regulatory Considerations ............. 152
a. U.S. CFIUS Considerations .................... 153
b. Non-U.S. Regimes .................................. 156
2. Integration Planning and Due Diligence ............. 158
3. Competition Review and Action ......................... 159
4. Deal Techniques and Cross-Border Practice ...... 161
5. Acquisition Financing and Restructuring in
Cross-Border Transactions.................................. 163
6. U.S. Cross-Border Securities Regulation............ 164
C. Deal Consideration and Transaction Structures .............. 165
1. All-Cash .............................................................. 166
2. Equity Consideration .......................................... 166
3. Stock and Depositary Receipts ........................... 167
4. “Dual Pillar” Structures ...................................... 167
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Takeover Law and Practice
I.
Current Developments
A. Overview
The last several decades have witnessed a number of important legal, financial
and strategic developments relating to corporate transactions. Many of these
developments have complicated the legal issues that arise in connection with mergers and
acquisitions, tender offers and other major corporate transactions. Changes in stock
market valuations, macroeconomic developments, the financial crisis and associated
policy responses, tax reform and changes in domestic and foreign accounting and
corporate governance crises have added complexity. The substantial growth in hedge
funds and private equity, the growing receptiveness of institutional investors to activism
and the role of proxy advisory firms have also had a significant impact.
The constantly evolving legal and market landscapes highlight the need for
directors to be fully informed of their fiduciary obligations and for a company to be
proactive and prepared to capitalize on business-combination opportunities, respond to
unsolicited takeover offers and shareholder activism and evaluate the impact of the
current corporate governance debates. In recent years, there have been significant court
decisions relating to fiduciary issues and takeover defenses. While these decisions
largely reinforce well-established principles of Delaware case law regarding directors’
responsibilities in the context of a sale of a company, in some cases they have raised
questions about deal techniques or highlighted areas where other states’ statutory
provisions and case law may dictate a different outcome than would result in Delaware or
states that follow Delaware’s model.
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B. M&A Trends and Developments
1. Deal Activity
The COVID-19 pandemic has been, and is likely to continue to be, the dominant
driver of deal activity (or inactivity) for much of 2020. Global M&A volume was $1.123
trillion in the first half of 2020, a notable decline from $2.140 trillion and $2.358 trillion
in the first half of 2019 and 2018, respectively. While global deal volume fell to a low of
less than $120 billion in April 2020, deal volume rebounded to over $375 billion in July
2020. At the time of publishing this outline, COVID-19 and the unprecedented and novel
actions taken to contain it continue to have a significant impact on the economy, capital
markets and business operations around the world. Uncertainty regarding governmental
responses, duration of the economic disruption, timing for a return to normalcy and
access to capital markets presents a significant headwind to global M&A with numerous
pending M&A transactions having been terminated and few new deals being struck.
Examples include the mutual termination of a $6.4 billion merger between aerospace
suppliers Hexcel and Woodward, the mutual termination of the merger of equals between
Texas Capital Bancshares and Independent Bank Group, and SoftBank’s withdrawal of
its $3 billion tender offer for WeWork shares. Many other deals are facing threatened or
pending litigation relating to alleged violations of covenants to operate in the ordinary
course of business or the occurrence of a “material adverse effect.”
However, as with the 2008 financial crisis, the economic turmoil also may present
dealmakers with new opportunities. Corporations may consider divestures and
restructurings to enhance liquidity and direct resources to core business lines.
Opportunities for buyers to acquire distressed targets may increase, as may private
investment in public equity (“PIPE”) transactions. As uncertainty subsides, market
dislocations relating to COVID-19 may present openings for investors and strategic
acquirors to consummate transactions that were not viable when the market was at record
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highs. Parties are also likely to focus more on provisions in transaction agreements that
have become central in evaluating the contractual path forward on pending deals, such as
“material adverse effect” provisions (including their carve-outs and limitations on those
carve-outs) and “ordinary course of business” covenants. The outcome of litigation
involving the interpretation of material adverse effect provisions and covenants to operate
in the ordinary course of business will influence legal drafting and the decision-making
of companies considering strategic transactions throughout the COVID-19 pandemic and
beyond. “Material adverse effect” or “material adverse change” provisions are discussed
in further detail in Section V.B.
The tech sector continued to drive M&A in 2019, with 16% of global M&A
volume and 20% of U.S. M&A volume involving a tech company as an acquiror or
target. A tech company was a transaction participant in five of each of the top 20 global
deals and top 20 U.S. deals in 2019. Some notable tech deals in 2019 included the
London Stock Exchange’s $27 billion acquisition of Refinitiv, Salesforce’s $15.7 billion
acquisition of Tableau Software, Broadcom’s $10.7 billion acquisition of Symantec’s
enterprise security business, eBay’s $4 billion dollar sale of StubHub to viagogo and the
$21.5 billion Global Payments merger with TSYS.
There have also been a number of important developments in the private and
public capital markets that have affected, and will continue to affect, tech companies and
the M&A markets. Over the past several years, tech companies have enjoyed access to
record levels of private capital from a combination of venture capital funds, private
equity funds, corporate investors, pension funds and large institutional investors.
Together with greater pre-IPO liquidity for founders, employees and early investors, this
has significantly extended the length of time tech companies have been able to remain
private and has allowed them to fund exponential growth without having to access the
public markets. Flexibility in the securities laws governing private securities offerings
(which the SEC has proposed to expand) and an increase in the number of shareholders
that SEC rules allow a company to have before incurring public reporting obligations
have facilitated this trend. If not for the significant liquidity afforded by the public
markets, some tech companies might forgo becoming subject to the heightened scrutiny,
regulation and short-term pressures of the public equity markets in favor of a continued
private company existence—including via a sale—that is often more accommodating of
continuous heavy investment in R&D and product development at the expense of near-
term profits. In 2019, there were a number of high-profile and high-value IPOs of tech
companies that had extended private lifecycles, including Uber, Lyft and Pinterest.
However, disappointing post-IPO trading by some (although certainly not all)
companies—as well as aborted IPOs (with WeWork being the most prominent
example)—has resulted in increased scrutiny of valuations of private companies seeking
to tap the public markets. In addition, investors have focused on a clearer understanding
of the path to profitability and, in some cases, tighter governance controls (often at the
expense of founders).
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Global biopharma M&A volumes reached a record in 2019, with megamergers,
such as the Bristol-Myers Squibb/Celgene deal, the AbbVie/Allergan deal and the
Pfizer/Mylan deal, leading the way. Key trends that contributed to this increased activity
included: (1) the drive to innovate, as large pharma continues to look to biotech
companies to deal with patent expirations, especially in areas such as oncology, gene
therapy, and rare diseases; (2) the desire to increase efficiency and build scale, as
companies prepare for pricing pressure; and (3) convergence, as companies made vertical
moves up and down the supply chain, seeking to provide more “one-stop shopping” for
consumers (for example, insurance companies buying pharmacy benefit managers and
healthcare providers). Divestitures have also been a source of M&A in recent years as
companies reposition themselves to focus on chosen areas and to free up resources for
innovation in certain niches. Pfizer, Merck, and Eli Lilly, among others, have either
announced or executed major portfolio restructuring plans to focus attention on core
areas. With more generics flooding the market, prices continue to fall and generics
makers have seen steep declines in market value, which has made for a tough M&A
environment in this sub-segment. In addition, ongoing opioid litigation is an overhang in
some segments of biopharma, which can affect M&A activity and structuring. Finally, as
biopharma companies look to 2020 and 2021 and the mobilization of the healthcare
system to combat the COVID-19 pandemic, drug pricing and access to healthcare will
likely become even hotter political issues. Deal participants will need to remain sensitive
to regulatory and political considerations in connection with future deal announcements.
2. Unsolicited M&A
Although unsolicited acquirors remained active, the volume of these deals fell
globally both in absolute terms, from $522 billion in 2018 to $310 billion in 2019, and in
terms of share of overall deal volume, from 13% in 2018 to less than 8% in 2019. 2019
saw an increase in the number of topping bids relative to 2018, 2017 and 2016, and
included a few high-profile topping bids, such as Occidental’s successful $38 billion
topping bid for Anadarko Petroleum and WESCO’s successful $4.5 billion topping bid
for Anixter.
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3. Private Equity Trends
Private equity had a strong finish to the decade. Global private equity-backed
buyout volume was nearly $400 billion in 2019, which represented a 20% decline relative
to 2018, but was still quite robust by historical standards, fueled by a number of
megadeals, significant dry powder and record-low interest rates.
Global private equity fundraising in 2019 continued its downward trend relative
to 2017, its all-time high, while U.S. private equity fundraising had a banner year. As in
recent years, fundraising was concentrated in a relatively small number of large funds
raised by established firms. Blackstone Capital Partners closed the largest-ever buyout
fund in the third quarter at $26 billion, and Vista Equity Partners raised the largest-ever
tech fund at $16 billion. With over $1.5 trillion of dry powder, the highest year-end total
on record, capital supply is more than ample. Yet, this massive stockpile of cash is
fueling both optimism as well as concerns. Over the 25-year period ended March 2019,
private equity funds returned over 13% per year on average, compared with about 9% for
the S&P 500. With heavy competition, PE firms face an uphill battle to sustain
outperformance.
Nevertheless, PE firms are looking to deploy their record amount of dry powder,
and the market decline resulting from the COVID-19 pandemic may present new M&A
opportunities once debt capital markets stabilize. In the meantime, many PE firms may
consider distressed equity, debt or convertible investments in companies that need
liquidity but for which more traditional avenues of funding from banks may not be
available at favorable terms (or at all). For example, in May 2020, Apollo Global
Management and KKR announced the raising of $1.75 billion and $4 billion,
respectively, for new credit funds that will focus on dislocations from the COVID-19
pandemic. In addition, the COVID-19 pandemic has caused the debt of many companies
already within a private equity portfolio to trade at a discount, leading some private
equity investors to contemplate investing in the secondary market by buying the debt of a
portfolio company. Moving forward, the ability of PE firms to consummate new
transactions during and in the immediate aftermath of the COVID-19 crisis may depend
in part on the amount of time and effort such firms must spend stabilizing their existing
portfolio companies.
There were a number of $10 billion-plus private equity deals in 2019, including
Blackstone’s $18.7 billion purchase of the U.S. warehouse portfolio of Singapore-based
GLP (the largest private real estate deal in history), EQT’s $10.1 billion purchase of
Nestlé’s skincare unit, and the $14.3 billion sale of communications infrastructure
services provider Zayo Group to Digital Colony Partners and EQT.
While a handful of megadeals took the spotlight in 2019, several other deals,
including Apollo’s reported bid for Arconic, collapsed after months of negotiation; and
the strong reported private equity activity in 2019 does not take into account the
extensive sponsor participation in auctions and other deal pursuits that ultimately did not
succeed. Given significant efforts by strategic buyers to achieve scale and synergies,
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private equity sponsors were particularly competitive in pursuits where they had a
portfolio company to build on or strategic bidders lacked interest. The challenges and
risks associated with big take-privates led some private equity firms to focus their
attention on the opposite end of the deal size spectrum. Private equity buyouts and
investments with a price tag of less than $500 million now account for nearly 30% of the
industry’s dealmaking by value, the highest level in nearly a decade.
The line between hedge fund activism and private equity continues to blur, with
some activist funds becoming bidders themselves for all or part of a company, and a
handful of private equity funds exploring activist-style investments in, and engagement
with, public companies. For example, Starboard Value announced a $200 million
strategic investment in Papa John’s in February 2019; Elliott’s private equity affiliate,
Evergreen, closed its take-private of Travelport in partnership with Siris Capital in May
2019; and KKR disclosed a minority ownership position in Dave & Buster’s. TPG was
also reported to be raising an activist fund focused on building minority stakes in large
public companies. While activist hedge funds and private equity firms generally have
quite different attitudes toward publicity and methods to bring about change at
companies, they often have coinciding objectives, and in some cases, limited partners.
4. SPAC Trends
Over the last few years, special purpose acquisition companies (“SPACs”) have
enjoyed a resurgence. SPACs raised $13.6 billion in 59 IPOs in 2019, an increase from
$10.7 billion raised in 46 IPOs in 2018, and these records have already been far surpassed
through only the first half of 2020, which saw dramatic growth in SPAC activity.
Before the IPO, the SPAC’s sponsor will purchase, for a nominal amount, shares
of a separate class of common stock that gives the sponsor the right to receive, upon
consummation of the de-SPAC transaction, 20% of the post-IPO common stock. In
addition, the SPAC’s sponsor will purchase warrants with terms mostly similar to those
offered to the public. The purchase price for these warrants (typically 2% of the IPO
size), will be added to the trust account and pay for IPO expenses and the SPAC’s
operating expenses before its business combination. This is often referred to as the
sponsor’s “at risk capital,” because, if the SPAC does not consummate a business
combination in the time allotted in its charter, then, absent shareholder approval for an
extension, the SPAC must liquidate, rendering the warrants worthless (a fact that may
provide a seller greater negotiating leverage toward the end of a SPAC’s liquidation
window).
Interest in SPACs has ebbed and flowed over the past several decades. It
dissipated after the financial crisis, but both the number and average size of SPAC IPOs
have been rising steadily since 2016. This trend has accelerated in 2020 thus far, with
more than $30.4 billion raised by SPACs in over 75 IPOs through August 20, 2020. In
July 2020, the largest-ever transaction with a SPAC—Churchill Capital Corp. III’s
proposed $11 billion acquisition of healthcare management services provider
MultiPlan—was announced, and the largest-ever SPAC IPO—that of hedge fund
manager Bill Ackman’s Pershing Square Tontine Holdings, which raised $4 billion—was
completed. Several high-profile companies have gone public through SPAC transactions
in the past year, including Virgin Galactic, DraftKings and Nikola.
These trends have helped SPACs become a fixture of the current IPO and M&A
environments and reduced their historical associations with financial underperformance
and risk. According to a recent analysis by Goldman Sachs, SPACs’ overall financial
performance has varied widely, but on average lags behind the S&P 500 and Russell
2000 indices over the long run after their business combinations are completed. The
current generation of SPACs, however, has seen deal announcements received positively
by investors at higher rates, and many companies that have gone public through a SPAC
transaction in recent years have maintained stock prices well above the SPAC’s IPO
price.
SPAC transactions carry distinct risks for their counterparties. Most significantly,
given the SPAC’s shareholders’ option to have their shares redeemed in connection with
the shareholder vote on the transaction, SPAC transactions contain an IPO-like element
of market risk. In addition, the typical structure of a SPAC generally results in
significant dilution for target shareholders. Nevertheless, SPAC transactions have
become an increasingly popular alternative to the traditional IPO as a means of taking a
private company to the public markets. Especially in the volatile and uncertain market
conditions that have persisted in the wake of the COVID-19 pandemic, some private
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companies may prefer the relative pricing transparency, speed and confidentiality
afforded by a SPAC transaction as compared to an IPO. Other companies may conclude
that partnering with a SPAC management team that includes former public company
executives or seasoned investors will facilitate a more successful public listing or
enhance their long-term business prospects. So far, it appears that investors’ support for
the SPAC model has strengthened in the COVID-19 era, perhaps in part due to the
flexibility SPACs have in pursuing a target based on market conditions and in part due to
the downside protection afforded by shareholders’ redemption rights.
Regardless of how long SPACs maintain their current momentum, given the
number of SPACs now searching for targets with record levels of cash to spend, SPACs
are likely to continue to play an important role in the M&A landscape in 2020 and in
years to come
5. Acquisition Financing
After a strong 2019, the financing markets experienced sudden and severe
upheaval as a result of the COVID-19 crisis. In the first few weeks of the crisis, even
investment-grade debt markets were challenged. As the government rolled out enormous
fiscal and monetary measures designed to calm the markets and stabilize the economy,
the investment-grade markets began to stabilize. And by late spring and early summer,
high-yield issuances resumed at a blistering pace.
6. Shareholder Litigation
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Trulia decision curtailing the ability to settle such suits in Delaware—the bulk of these
merger-objection suits were styled as claims under the federal securities laws and were
filed in federal court. Recent reports from NERA and Cornerstone Research show that
the number of federal securities class action lawsuits in 2019, driven in large part by
these merger-objection suits, remained at or above the record high set in 2018.1 Such
litigation generally challenges disclosures made in connection with M&A activity under
Sections 14(a), 14(d), and/or 14(e) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) and sometimes also alleges breaches of state-law fiduciary duties.
However, the number of such merger-objection suits in 2019 decreased approximately
15% compared to 2018 levels.2 The overwhelming majority of such federal suits were
“mooted” by the issuance of supplemental disclosures and payments of the stockholder
plaintiffs’ lawyers’ fees. Unless the federal courts begin applying heightened scrutiny to
such resolutions akin to Delaware’s Trulia review of settlements, we expect this litigation
activity will continue.
The suits that remain in Delaware are being settled less frequently and litigated
more vigorously. As we discuss in Section II.C.1, the Delaware Court of Chancery has
continued to expand the circumstances in which a “controlling” stockholder is found to
exist in a transaction. This expansion has created opportunities for plaintiffs to avoid
dismissal under the Corwin doctrine (which allows for pleadings-stage dismissals of
certain types of suits based on fully informed stockholder approval of non-controlling
stockholder transactions) by alleging that the challenged transaction concerned
controlling stockholders. Stockholder appraisal litigation, which allows a stockholder to
forego receipt of merger consideration in a transaction and instead seek an award from a
Delaware court of the “fair value” of the stockholder’s shares, has continued to abate in
the wake of several significant decisions from the Delaware Supreme Court emphasizing
the importance of the deal price in assessing fair value.3 Although appraisal risk should
continue to be considered in the context of each particular transaction, these decisions
appear to have discouraged the widespread abuse of appraisal litigation that plagued the
M&A market for nearly a decade. The number of appraisal petitions filed in the
Delaware Court of Chancery fell from a peak of 76 in 2016 to only 26 in 2018.4
Books and records demands, and litigation related to those demands, have also
been the subject of notable recent rulings in the Delaware courts. In KT4 Partners LLC
v. Palantir Technologies, Inc., the Delaware Supreme Court considered a demand under
Section 220 of the Delaware General Corporation Law (the “DGCL”) for electronic
records, including e-mails, which the Delaware Court of Chancery had denied.
Reversing the Delaware Court of Chancery, the Delaware Supreme Court held that the
production of e-mail records was required because the company had “a history of not
complying with required corporate formalities” and conducted business informally,
including over e-mail.5 The Court nonetheless suggested that companies that
“documented [their] actions through board minutes, resolutions, and official letters”
would generally be able to satisfy a Section 220 demand using those formal records
without the need for an e-mail production.6 The Delaware Court of Chancery has also
recently required the production of unconventional sources of information in addition to
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board materials, including the communications from board members’ personal e-mail
addresses and personal devices, in the context of a Special Committee’s decision to
terminate certain agreements with the company’s founder,7 and the production of a
company witness for a deposition on the sources and locations of company books and
records other than formal board materials, in the context of a company that refused to
provide information on the availability of such additional materials.8
The Delaware Court of Chancery’s late-2017 ruling in Lavin v. West Corp. has
encouraged greater use of the statutory books and records inspection rights of Section
220 of the DGCL in connection with proposed M&A activity.9 There, the Court
confirmed that stockholders may use their Section 220 rights to investigate suspected
wrongdoing by the board in agreeing to a sale of the company, ruled that such requests
are subject to the same stockholder friendly standard that applies in other contexts (any
proper purpose reasonably related to the stockholder’s interest as a stockholder), and held
that fully informed stockholder approval of the transaction will not extinguish a
stockholder’s right to demand inspection of books and records related to the transaction.
Stockholder activists have also begun making greater use of Section 220 books
and records demands in their campaigns to scuttle deals, such as Carl Icahn’s books and
record inspection demand of SandRidge Energy for documents relating to its proposed
merger with Bonanza Creek Energy, Inc. However, the Delaware Court of Chancery has
recently articulated limits on the ability of an activist to access corporate books and
records to challenge transactions through a proxy contest. In High River Limited
Partnership v. Occidental Petroleum Corp., Vice Chancellor Slights denied a books and
records demand in connection with Icahn’s proxy contest against Occidental Petroleum.10
Icahn sought books and records concerning Occidental Petroleum’s decision to purchase
Anadarko Petroleum, and its decision to pursue the acquisition rather than to explore a
sale.11 The Court found that Icahn’s disagreement with the board’s business judgment
was not sufficient to infer mismanagement or wrongdoing, and the Court rejected the
argument that the records should be provided because they would be material to a proxy
contest.12 The Court concluded that the demanded records were not “essential” to Icahn’s
purpose of communicating concerns to fellow stockholders, because Icahn already had
sufficient public information concerning the challenged transactions to voice his concerns
without the need for “a fishing expedition into the boardroom.”13
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than 1% of their shareholder base. Activists’ assets under management (“AUM”) have
grown substantially in recent years, with the 50 largest activists ending 2019 with $184
billion in equity assets. Matters of business strategy, operational improvement, capital
allocation and structure, CEO succession, M&A, options for monetizing corporate assets
and other economic decisions have also become the subject of shareholder referenda and
pressure. Hedge fund activists have also pushed for governance changes as they court
proxy advisory services and governance-oriented investors, and have run (or threatened)
proxy contests, usually for a short slate of directors, though increasingly for control of the
board. Activists have also increasingly targeted top management for removal and
replacement by activist-sponsored candidates. In addition, activists have worked to block
proposed M&A transactions, mostly on the target side but also sometimes on the acquiror
side.
The number of public campaigns in 2019 decreased compared to the record set in
2018, although activity remained consistent with average levels seen in recent years. 187
companies were targeted by activists via 209 campaigns, a 17% decrease compared to the
226 companies targeted in 2018 via 248 campaigns. Nevertheless, 147 investors engaged
in activism in 2019, the highest on record, suggesting that the pool of activists has grown.
Many campaigns in 2019 ended with announced settlements with activist hedge
funds, but several “went the distance” all the way to the annual meeting. Of the 38% of
proxy fights that went to a vote in 2019, management won a complete victory in slightly
more than 50% of cases, which was comparable to management’s success rate in proxy
fights that went to a vote in 2018 and 2017. There are an increasing number of activism
situations across industries that begin—and may be resolved—behind the scenes through
private engagement and negotiation. Of the campaigns that resulted in board seats for an
activist in 2019, approximately 84% ended via a settlement, an increase from the 78% of
seats won via settlement in 2018. Activists gained 122 board seats in 2018, a decrease
from the record 161 seats won in 2018, but higher than the 103 seats won in 2017.
Activists also frequently appoint directors who are independent of the activist.
Employees of the activist comprised only 23% of the board seats won by activists in
2019, a slight increase from 22% in 2018, but a decline from 27% in each of 2016 and
2017.
In July 2020, the SEC proposed an amendment to Form 13F that stands to reduce
the already limited transparency of activist ownership. The proposed amendment would
exempt from filing all money managers holding less than $3.5 billion of “13(f) securities”
(without regard to the fund’s overall size or total assets under management). Because
many activists do not own $3.5 billion of 13(f) securities, adoption of this revision would
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permit them to “go dark” and make it significantly more difficult to determine whether an
activist, or a “wolf pack” of activists, owns a stake in a company. Increasing the
threshold to $3.5 billion from the current cut-off of $100 million would slash the number
of reporting filers by 90%, from 5,089 to 550, effectively abolishing Form 13F as a
reporting system for most investors, including many activist and event-driven hedge
funds. If adopted as proposed, the amendment would increase the potential for market
abuse by sophisticated investors who wish to accumulate shares on a stealth basis.
In the context of the COVID-19 pandemic, the first half of 2020 was the quietest
opening quarter to a year since 2015: 522 companies worldwide were publicly subject to
activist demands during the first half of 2020, compared to 628 and 695 companies
during the first half of 2019 and 2018, respectively. Factors potentially discouraging
activism include uncertain markets, which make it difficult to see the bottom for both
activists and other investors; uncertain shareholder vote outcomes, as it is not clear how
investors will react to individual activist campaigns in light of the unprecedented nature
of the situation, especially given they are busy tending to problems throughout their
portfolios; activists themselves may similarly be distracted by trying to preserve value in
investments that have taken significant losses and where the investment thesis (e.g.,
capital return or M&A) is no longer viable; activists may not have funds to invest,
especially if limited partners are seeking to withdraw money to raise cash or cover losses
elsewhere; activists may not be willing to “invest” in a proxy fight for the reasons stated
above as well as due to the overall cost of a campaign; logistical challenges (e.g., delayed
and/or virtual shareholder meetings and disrupted banking, brokerage and SEC
operations); and the negative optics of an activist campaign while management tackles
the fallout from COVID-19. However, factors potentially encouraging activism include
discounted stock prices (although stock prices continue to rebound at the time of
publishing this outline) and a perception that boards may be distracted. Accordingly,
some activists may view the COVID-19 pandemic as an opportune time to raise capital
and seek to differentiate themselves if they can successfully prosecute campaigns in the
challenging environment and be perceived as the early investors in a rally. Moreover,
numerous activist investors have used reduced valuations as an opportunity to increase
positions in targets that pre-dated the COVID-19 pandemic. Ultimately, the impact of the
COVID-19 pandemic on activism is highly situation-specific and will depend on the
pandemic’s duration and overall impact. Cash-heavy, experienced activists may be better
positioned to take on the risks in the current environment than newer activists who are
more exposed to the risk of substantial redemptions by their limited partners and may be
unable to hold certain positions for months or years on end.
b. M&A Activism
c. Tactics
Activists have also become more sophisticated, hiring investment bankers and
other seasoned advisors to draft “white papers,” aggressively using social media and
other public relations techniques, consulting behind the scenes with traditional long-only
investment managers and institutional shareholders, nominating director candidates with
executive and industry expertise, invoking statutory rights to obtain a company’s
nonpublic “books and records” for use in a proxy fight, deploying precatory shareholder
proposals, and being willing to exploit vulnerabilities by using special meeting rights and
acting by written consent. Special economic arrangements among hedge funds continue
to appear from time to time, as have so-called “golden-leash” arrangements between
activists and their director nominees, whereby the activist agrees to pay a director
nominee for the nominee’s service on, or candidacy for, the board. Most companies have
developed measures to reveal these arrangements through carefully drafted bylaw
provisions that address undisclosed voting commitments and compensation arrangements
between activist funds and their director nominees. And activists continue to use
statutory books and records inspection rights of Section 220 of the DGCL to aid
challenges to M&A activity, as described in Section I.B.5.
-13-
The economic disruption caused by the COVID-19 pandemic has led activist
investors to adopt new strategies. Some activists with sufficient capital have entered into
PIPE deals and other investment opportunities with respect to distressed companies in
need of additional liquidity. Examples include Providence Equity Partners and Ares
Management’s $400 million investment in convertible preferred stock of Outfront Media
and Roark Capital’s $200 million investment in convertible preferred stock of The
Cheesecake Factory. The COVID-19 pandemic may also have longer-term impacts on
activist strategies if certain activist theses, such as increased stock buybacks, continue to
face heightened scrutiny even after the end of the COVID-19 pandemic.
2. Governance Landscape
Spurring the emergence of the New Paradigm is that index-based and other
“passive” funds, with their longer time horizons for investing in particular companies,
continued to grow in size and importance into 2020. Of the $10 trillion in AUM by
investors in publicly traded equities, the split between passive and active is almost
50%/50%, a sea change from two decades earlier when passively held assets represented
only 6% of a much smaller AUM pool. Over the course of 2019, over $162.7 billion
flowed into U.S. passively managed equity funds, a decrease from the over $200 billion
that poured into such investments in 2018. Conversely, 2019 saw investors pull over
$204.1 billion from actively managed funds, increasing the pressure faced by the
portfolio managers to show near-term returns and outperformance. Many of the
-14-
companies that constitute the S&P 500 now have Vanguard, BlackRock and State Street
in the “top five” of their shareholder register, with the broader ownership base being
primarily institutional. These changes underscore the importance of ongoing shareholder
engagement and index fund support and the risks companies face if they take such
support for granted.
Even activist hedge funds are recognizing that broader stakeholder concerns
should take a more prominent role in their activities. Some activist hedge funds are
beginning to invoke ESG-related themes in their investments to try to appeal to certain
institutional investors. For example, JANA Partners teamed up with CalSTRS on a
platform of encouraging Apple to provide more disclosures regarding parental controls
and tools for managing use of technology by children, teenagers and young adults.
JANA Partners was raising a “social impact” fund, although it announced in June 2019
that it was delaying fundraising efforts. Trillium Asset Management filed a first-of-its-
kind proposal at Nike urging the board to improve oversight of workplace sexual
harassment and to improve gender diversity and pay disparity, which it ultimately
withdrew following a commitment by Nike to evaluate its request and meet quarterly to
discuss the results. In June 2020, Jeff Ubben, founder of ValueAct Capital, stepped down
from ValueAct and together with several others, formed a new activist fund, Inclusive
Capital Partners (ICP), to “partner with management and the boards of companies whose
core businesses seek to achieve the reversal of corporate harm” in environmental and
societal areas.
-15-
the financial statements filed with those reports. Companies have begun to review
compliance and oversight polices to ensure adherence to new obligations.
Shareholder advisory services, such as ISS and Glass Lewis, continue to have an
outsized role in the governance landscape, including with respect to shareholder
proposals. These shareholder advisory services publish proxy voting guides setting forth
voting policies on a variety of common issues that are frequent subjects of shareholder
proposals. By outsourcing judgment to consultants or otherwise adopting blanket voting
policies on various governance issues, institutional shareholders increasingly do not
review individual shareholder proposals on a company-by-company basis. As a result,
many shareholder votes may unfortunately be preordained by a blanket voting policy that
is applied to all companies without reference to the particulars of a given company’s
performance or governance fundamentals. Notable exceptions to this general trend
involve some large funds, such as BlackRock, State Street and Vanguard, which have
formed their own large internal governance departments and have been more proactive in
engaging directly with companies. Actively managed funds are also building out their
own dedicated governance- and ESG-focused teams as well, even as portfolio managers
remain the most important audience at such investors.
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The discussion below sets forth recent trends relating to certain key governance
matters.
-17-
receive a single “universal” proxy card presenting both company and dissident nominees,
enabling them to “mix and match.” As of the writing of this outline, the outcome of the
proposal has not been determined. To date, there have been less than a handful of
instances in which parties have attempted to implement a universal proxy card by
agreement.
While many large companies have shareholder rights plans (also known as a
“poison pill”) “on-the-shelf” ready to be adopted promptly following a specific takeover
threat, these companies rarely have standing rights plans in place. According to FactSet,
at year-end 2019, only 1.2% of S&P 500 companies had a shareholder rights plan in
effect, down from approximately 45% at the end of 2005. Importantly, unlike a
staggered board, a company can adopt a rights plan quickly if a hostile or unsolicited
activist situation develops. However, as discussed further in Section VI.A, companies
should be aware of ISS proxy voting policy guidelines regarding recommendations with
respect to directors of companies that adopt rights plans. In light of the impacts of the
COVID-19 pandemic and the possibility of activists building a large stake rapidly and
under the disclosure radar, a handful of companies, especially those whose market
capitalization have dropped below $1 billion, have implemented shareholder rights plans
as of early April 2020. Many more companies, particularly those whose market valuation
has dropped below $1 billion, are considering adopting a shareholder rights plan and
having a rights plan “on the shelf and ready to go.” ISS’s COVID-19 policy guidance
released in April 2020 noted that ISS would continue to take a case-by-case review of
shareholder rights plans with a duration of less than a year, but noted that a severe stock
price decline as a result of the COVID-19 pandemic is likely to be considered valid
justification in most cases for adopting a shareholders rights plan of less than one year in
duration. Additionally, governance advisors focus on charter and bylaw provisions
adopted by newly public companies and shareholder activists have pressured companies
to remove, or agree not to include, several anti-takeover defenses in spin-off companies’
governance documents. Select public companies in the U.S. are also considered adopting
net operating loss carryforwards (“NOL”) rights plans to preserve tax assets amid market
fluctuations caused by the COVID-19 pandemic. NOL rights plans are discussed below
in Section VI.A.
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2019, approximately 69.8% of S&P 500 companies prohibit shareholder action by written
consent. During 2005-2009, only one Rule 14a-8 shareholder proposal was reported to
have sought to allow or ease the ability of shareholders to act by written consent. From
2010 to 2019, however, there were 275 such proposals (approximately 18% of which
passed). Hostile bidders and activist hedge funds have effectively used the written
consent method to facilitate their campaigns, and companies with provisions permitting
written consent should carefully consider what safeguards on the written consent process
they can legally put in place without triggering shareholder backlash.
Special Meetings. Institutional shareholders have also been pushing for the right
of shareholders to call special meetings in between annual meetings, and shareholder
proposals seeking such a right can generally be expected to receive significant support,
depending on the specific threshold proposed by the shareholder and the company’s
governance profile. As of early 2020, over 65% of S&P 500 companies permit
shareholders to call special meetings in between annual meetings. Care should be taken
in drafting charter or bylaw provisions relating to special meeting rights to ensure that
protections are in place to minimize abuse while avoiding subjecting institutional
shareholders who wish to support the call of a special meeting to onerous procedural
requirements. Companies should also be thoughtful in deciding how to respond to
shareholder proposals seeking to reduce existing meeting thresholds, including whether
or not to seek exclusion of the proposal by putting forward a company-styled ratification
proposal.
Independent Board Chair. For the past several years, shareholder proposals to
create an independent Chairman by separating the CEO and Chairman positions have
been one of the most frequent governance-related shareholder proposals. As of early
2020, 32% of S&P 500 companies had an independent Chairman. Although only 5.6%
of these shareholder proposals have passed since 2005 and none have passed since 2016,
we expect that these shareholder proposals will continue to be made with regularity.
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3. Debt Activism
2019 saw the most prominent example of debt default activism yet come to a
swift and striking conclusion, with telecommunications provider Windstream losing its
much-watched litigation with the hedge fund Aurelius Capital—which was widely
believed to be “net-short” Windstream’s debt—and subsequently entering bankruptcy.
Borrowers have begun trying to preempt the threat of debt default activism by including
provisions in new debt agreements that undermine key activist strategies, including net-
short strategies. However, with such provisions being new and untested—and, of course,
completely absent from debt documents issued before 2019—debt default activism is not
likely to subside in the near term. Companies with debt trading below par should stay
particularly alert to the threat of default activism, especially when they are weighing
covenant-implicating transactions. It is no longer sufficient for borrowers to consider
only the “four corners” of a debt document when analyzing whether a transaction is
permitted by its covenants, as activists have increasingly sought to meld arguments of
breach-in-form with allegations of breach-in-substance. Obviously, major corporate
transactions cannot simply be put on hold for fear of a spurious challenge. But before
completing a transaction, it is worth assessing what arguments a creative activist could
make against it. In many cases, there are proactive process and documentation steps that
a borrower can take that will blunt the risk of such future arguments.
How the COVID-19 crisis impacts debt default activism remains to be seen. On
the one hand, financial hardship makes borrowers more vulnerable to these strategies; on
the other, widespread market distress may create more opportunities for default activist
funds to engage in regular-way distressed-debt investing instead of more complicated
default activism.
D. Antitrust Trends
In 2019, with robust M&A activity, the U.S. antitrust agencies investigated and
challenged transactions in many sectors of the economy. The Federal Trade Commission
and the U.S. Department of Justice initiated court challenges to block four proposed
transactions and required remedies in 17 more. Companies also abandoned five
transactions due to antitrust agency opposition, including three transactions abandoned
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shortly after the agency filed its court challenge. In addition, a coalition of state attorneys
general challenged the merger of T-Mobile and Sprint, a transaction cleared, with the
imposition of conditions, by the DOJ and the Federal Communications Commission. The
state attorneys general’s challenge failed when the district court for the Southern District
of New York ruled for the companies in February 2020.
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2. Remedies Can Save the Day in Strategic Deals
To the extent remedies are required to obtain clearance, structural divestitures will
remain the remedy of choice, and the agencies will continue to require parties to address
concerns as to the adequacy of any remedial package, including an upfront buyer. The
DOJ’s recently issued Merger Remedies Manual confirms the agency’s default
preference for structural relief over conduct remedies. The Manual also memorializes
existing agency practice regarding the preference for “divestiture of an existing
standalone business” and an expectation “in most merger cases” that parties must
negotiate, finalize, and execute a divestiture agreement with an approved “upfront” buyer
before closing. Contrary to recent agency experience, however, the Manual puts strategic
and private equity divestiture buyers on an equal footing, even noting that “in some cases
a private equity purchaser may be preferred.” The agencies’ rigorous approach to
divestiture remedies will continue to result in significant delays in the merger review
process, particularly during the current COVID-19 pandemic, as merging parties may
face challenges in marketing divestiture assets and finding suitable buyers.
-22-
Like many other agencies and organizations across the country, in March 2020
the FTC and DOJ took certain actions to adjust to the realities of working during the
COVID-19 pandemic, including primarily by moving to remote work. The agencies are
currently conducting investigations remotely, including through virtual meetings and
depositions. The FTC implemented a novel electronic HSR filing process to replace
physical deliveries, a change that may become a lasting improvement. The DOJ
announced that it will require an additional 30 days after substantial compliance with a
Second Request to complete its merger reviews, and the agency is reopening active
timing agreements with parties to reflect the change. Similarly, the FTC announced that
it will review pending merger investigations for potential modifications of timing
agreements. Potential delays due to the challenges of remote investigations, as well as
the challenges of obtaining information from customers and other third parties, may
result in more deals being subject to Second Request investigations. Indeed, FTC
Commissioner Christine Wilson tweeted on March 19 that the FTC will not hesitate to
issue Second Requests to prevent deals from closing without appropriate review during
the crisis.
Despite the challenges caused by the pandemic, the FTC and DOJ remain
committed to their enforcement mandates to protect and promote competition and have
signaled that they do not intend to relax their scrutiny of potential anticompetitive
transactions. In a recent speech, the FTC’s Director of the Bureau of Competition stated
that the Commission is “not changing our enforcement priorities or our enforcement
standards.”17 The antitrust laws, however, are flexible enough to accommodate a
dramatically changing competitive environment, particularly with respect to transactions
involving distressed companies. Courts in the U.S. recognize the “failing firm” doctrine
as a defense to otherwise unlawful mergers and acquisitions. The defense is difficult to
sustain, as the FTC and DOJ Horizontal Merger Guidelines require that the parties
demonstrate the probability of imminent business failure of the target company; an
inability for the target to reorganize successfully; and the absence of any other
prospective buyer that would keep the assets in the market and “pose a less severe danger
to competition than does the proposed acquisition.”18 Unless the parties can show
unsuccessful good-faith efforts to shop the target company widely “to elicit reasonable
alternative offers,”19 the agencies will not credit the defense. Notwithstanding the
challenge of proving these elements, we anticipate many attempted failing firm defenses
in the coming months. Indeed, the DOJ recently cleared the proposed acquisitions by
Dairy Farmers of America and Prairie Farms Dairy of fluid milk processing plants from
Dean Foods out of bankruptcy, recognizing the unprecedented challenges faced by the
dairy industry, “with the two largest fluid milk processors, Dean and Borden Dairy
Company, in bankruptcy, and a pandemic causing demand for milk by schools and
restaurants to collapse” and Dean faced with imminent liquidation.20 While the DOJ
requested divestiture of three fluid milk processing plants being acquired by Dairy
Farmers of America, it closed its investigation into Prairie Farms’ proposed acquisition of
processing plants from Dean in the South and Midwest after concluding that the plants at
issue likely would be shut down if not purchased by Prairie Farms because of Dean’s
-23-
distressed financial condition and the lack of alternate operators who could timely buy
the plants.
-24-
II.
The basic duties of corporate directors are to act with care and loyalty. But the
level of scrutiny with which courts will review directors’ compliance with their duties
varies with situation and context. The default rule is the business judgment rule, which
holds generally that when directors act with due care and without personal conflict of
interest, the business results—even materially negative results—of their decision-making
generally will not be considered a breach of their fiduciary duties. However, certain
contexts, including when directors defend against a threatened change to corporate
control or policy or engage in a sale of control of a company, invoke a heightened level
of scrutiny. Finally, in transactions involving a conflict of interest, an even more
exacting “entire fairness” standard may apply.
A. Directors’ Duties
Directors owe two fundamental duties to stockholders: the duty of care and the
duty of loyalty. Directors satisfy their duty of care by acting on a reasonably informed
basis. Directors satisfy their duty of loyalty by acting in good faith and in the best
interests of the stockholders and the corporation, rather than in their own interests or in
bad faith.
1. Duty of Care
At its core, the duty of care may be characterized as the directors’ obligation to
act on an informed basis after due consideration of relevant information and appropriate
deliberation. Due care means that directors should act to assure themselves that they
have the information required to take, or refrain from taking, action; that they devote
sufficient time to the consideration of such information; and that they obtain, where
useful, advice from counsel, financial advisors, and other appropriate experts.
Because a central inquiry in a duty of care case is whether the board acted on an
informed basis, a board should carefully document the basis for its decisions. While the
use of competent advisors will generally protect directors from potential liability and help
a board demonstrate that its decisions should not be set aside by the courts, ultimately
business decisions must be made by directors—they cannot be delegated to advisors.22
Delaware law is protective of directors who endeavor in good faith to fulfill their
duty of care. To demonstrate that the directors have breached their duty of care, the
plaintiff bears the burden of proof, and must prove that director conduct constitutes
“gross negligence,” measured under the standard announced in 1985 by the Delaware
Supreme Court in Smith v. Van Gorkom.24 Since Van Gorkom, the Delaware courts have
been careful to employ a genuine gross negligence standard before imposing due care
liability, and that reality, plus the ubiquity of exculpatory charter provisions, which we
next discuss, has meant that independent directors have faced virtually no monetary
judgments for due care liability.
2. Duty of Loyalty
Directors have a duty to act in a manner they believe to be in the best interests of
the corporation and its stockholders. This includes a duty not to act in a manner adverse
to those interests by putting a personal interest or the interests of someone to whom the
director is beholden ahead of the corporation’s or the stockholders’ interests. A classic
example of a breach of the duty of loyalty is a director engaging in a “self-dealing”
transaction. However, any time a majority of directors are either (a) personally interested
in a decision before the board or (b) not independent from or otherwise dominated by
someone who is interested, courts will be concerned about a potential violation of the
duty of loyalty and may review the corporate action under the “entire fairness” level of
scrutiny, described more fully below.26 Another such example is the corporate
opportunity doctrine, which is ancillary to the duty of loyalty that generally prohibits
directors from appropriating for themselves certain opportunities in which the corporation
has some interest or expectancy.27
The duty of loyalty also encompasses the concept of good faith. In its 2006
decision in Stone v. Ritter, the Delaware Supreme Court clarified that “the obligation to
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act in good faith does not establish an independent fiduciary duty that stands on the same
footing as the duties of care and loyalty.”28 Instead, the traditional duty of loyalty
“encompasses cases where the fiduciary fails to act in good faith.”29 Directors violate
their good faith obligations where such directors “intentionally act[] with a purpose other
than that of advancing the best interests of the corporation, where [such directors] act[]
with the intent to violate applicable positive law, or where [such directors] intentionally
fail[] to act in the face of a known duty to act, demonstrating a conscious disregard for
[their] duties.”30 Bad faith (which Delaware courts have held to be synonymous with an
absence of good faith)31 thus requires an inquiry into whether “directors utterly failed to
attempt” to comply with their responsibilities, rather than merely “questioning whether
disinterested, independent directors did everything that they (arguably) should have
done.”32
The fiduciary duties of care and loyalty are standards of conduct describing a
director’s obligations to the corporation.34 Whether a court determines that directors
breached their fiduciary duties can depend heavily on the standard of review the court
applies to the directors’ decision-making.
The traditional business judgment rule is the default standard of review applicable
to directors’ decisions. Under the business judgment rule, the court will defer to, and not
second guess, decisions made by directors who have fulfilled their duties of care and
loyalty. The purpose of the rule is to “encourage[] corporate fiduciaries to attempt to
increase stockholder wealth by engaging in those risks that, in their business judgment,
are in the best interest of the corporation ‘without the debilitating fear that they will be
held personally liable if the company experiences losses.’”35 In the case of a Delaware
corporation, the statutory basis for the business judgment rule is Section 141(a) of the
DGCL, which provides that “[t]he business and affairs of every corporation . . . shall be
managed by or under the direction of a board of directors.”36
In cases where the business judgment rule applies, directors’ decisions are
protected unless a plaintiff is able to prove that a board has in fact acted disloyally, in bad
faith, or with gross negligence.37 This rule prevents courts and stockholders from
interfering with managerial decisions made by a loyal and informed board unless the
decisions cannot be “attributed to any rational business purpose.”38 Indeed, the Delaware
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Court of Chancery has described business judgment review as a “bare rationality test.”39
If a plaintiff is able to rebut the presumptive protections of the business judgment rule,
the court will review the action under the more exacting standard of entire fairness.40
There are certain situations in which Delaware courts will not defer to board
decisions under the traditional business judgment rule. These include a board’s
(a) approval of transactions involving a sale of control41 and (b) adoption of defensive
mechanisms in response to an alleged threat to corporate control or policy.42
a. Revlon
However, it is also true that “there is no single blueprint that a board must follow
to fulfill its duties” in the Revlon context.49 The Delaware Supreme Court has held that
“[i]f a board selected one of several reasonable alternatives, a court should not second-
guess that choice even though it might have decided otherwise or subsequent events may
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have cast doubt on the board’s determination.”50 This flexibility is particularly
significant in determining a board’s Revlon obligations when it is considering a friendly
merger for cash but does not wish to engage in pre-signing negotiations with more than
one partner. The Court has recently stressed that “[w]hen a board exercises its judgment
in good faith, tests the transaction through a viable passive market check, and gives its
stockholders a fully informed, uncoerced opportunity to vote to accept the deal,” the
board’s Revlon obligations are likely met.51
The Revlon “duty to seek the best available price applies only when a company
embarks on a transaction—on its own initiative or in response to an unsolicited offer—
that will result in a change of control.”52 The most common example of this is where the
board of a non-controlled company decides to enter into a definitive agreement to sell the
company in an all-cash deal. But, where the board does not embark on a change-of-
control transaction, such as when it is arguably put “in play” by the actions of outsiders,53
Revlon review will not apply. Accordingly, enhanced scrutiny is not triggered by a
board’s refusal to engage in negotiations where an offeror invites discussion of a friendly
(or unfriendly) deal.54 Nor does Revlon obligate a company that has embarked on a sale
process to complete a sale process, even if the offers received are at a substantial
premium to the company’s current trading value. In addition, the Delaware Supreme
Court held in its seminal 1989 opinion in Time Warner that Revlon will not apply to a
merger transaction in which there is no change-of-control, such as in a purely stock-for-
stock merger between two non-controlled companies. Rather, the ordinary business
judgment rule applies to the decision of a board to enter into a merger agreement under
those circumstances.55 But, the Delaware Supreme Court later clarified in its decision in
Paramount Communications, Inc. v. QVC Network Inc., a stock-for-stock merger is
considered to involve a sale of control when a corporation that has no controlling
stockholder pre-merger would have a controlling stockholder post-merger.56 The reason
that pure stock-for-stock mergers between non-controlled entities do not result in a
Revlon-inducing “change-of-control” is that such combinations simply shift “control” of
the seller from one dispersed generality of public stockholders to a differently constituted
group that still has no controlling stockholder. Accordingly, the future prospect of a
potential sale of control at a premium is preserved for the selling company’s
stockholders. This principle applies even if the acquired company in an all-stock merger
is very small in relation to the buyer. Despite the formal difference between the
standards of review applicable to stock-for-stock transactions, the Delaware courts have
indicated in recent decisions that the doctrinal distinction is not absolute, and, even in all-
stock transactions, directors are accordingly well advised to consider alternatives for
maximizing stockholder value and to take care that the record reflects such
consideration.57
In addition, the Time-Warner decision makes clear that so long as the initial
merger agreement did not itself involve a change-of-control transaction, the appearance
of an unsolicited second bid (whether cash or stock) does not in and of itself impose
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Revlon duties on the target board. Rather, the seller in a strategic stock-for-stock deal, as
a matter of law, is free to continue to pursue the original proposed merger, assuming it
has satisfied the applicable standard. As the Court said, “[d]irectors are not obliged to
abandon a deliberately conceived corporate plan for a short-term shareholder profit
unless there is clearly no basis to sustain the corporate strategy.”58 In other words, a
Revlon situation cannot be unwillingly forced upon a board that has not itself elected to
engage in a change-of-control transaction. Absent the circumstances defined in Revlon
and its progeny, a board is not obligated to choose short-term over long-term value and,
likewise, “is not under any per se duty to maximize shareholder value in the short term,
even in the context of a takeover.”59 Thus, even if an unsolicited bid provides greater
short-term value than a stock-for-stock merger, the target’s board may attempt to
preserve or achieve for its shareholders the business benefits of the original merger
transaction so long as the original merger does not itself constitute a change of control.
However, as discussed below in Section II.B.2.b, Unocal review may apply to a board’s
defensive measures in the face of a competing bid, even when neither bid is subject to
Revlon review.
There is also no “change-of-control” triggering Revlon in the cash (or stock) sale
of a company with a controlling shareholder to a third party.60 Where a company already
has a controlling shareholder, “control” is not an asset owned by the minority
shareholders and, thus, they are not entitled to a control premium. The Delaware Court
of Chancery has expressly held, therefore, that the sale of controlled companies does not
invoke Revlon review.61
Although it is clear that all-cash deals invoke Revlon review and all-stock deals
do not, the standard is less clear with regard to situations in which the consideration is
mixed. In In re Santa Fe Pacific Corp., the Delaware Supreme Court held that a
transaction in which cash represented 33% of the consideration would not be subjected to
Revlon review.62 But the Delaware Court of Chancery has ruled that the Revlon standard
would likely apply to half-cash, half-stock mergers, reasoning that enhanced judicial
scrutiny was in order because a significant portion “of the stockholders’ investment . . .
will be converted to cash and thereby be deprived of its long-run potential.”63
Revlon applies only once the board actually makes the decision to embark on a
change-of-control transaction and not while it is exploring whether or not to do so.64
Accordingly, the board may change its mind at any time before making the decision to
enter into a transaction. However, once a board makes a decision that attracts the
heightened Revlon level of scrutiny, courts may look back at the board’s behavior during
the exploration process and may be critical of actions taken that appear unreasonable and
inconsistent with the board’s duty to maximize stockholder value.65 For this reason, it is
important for boards and their advisors to keep a good record of their reasons for taking
the actions they did.
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2. What Constitutes Value Maximization?
Revlon does not require boards to simply accept the highest nominal offer for a
company. A board may conclude that even a cash offer, although “higher” in terms of
price than another cash offer, is substantially less likely to be consummated; the risk of
non-consummation is directly related to value. Directors “should analyze the entire
situation and evaluate in a disciplined manner the consideration being offered. Where
stock or other non-cash consideration is involved, the board should try to quantify its
value, if feasible, to achieve an objective comparison of the alternatives.”66 In the
context of two all-cash bids, under certain circumstances a board may choose to take a
bid that is “fully financed, fully investigated and able to close” promptly over a
nominally higher, yet more uncertain, competing offer.67 Bids that present serious issues
concerning regulatory approval or the buyer’s ability to close may be viewed as less
attractive, although nominally higher, than offers that are more certain of consummation.
Boards have substantial latitude to decide what tactics will result in the best price.
As the Delaware Supreme Court recently reaffirmed, “Revlon and its progeny do not set
out a specific route that a board must follow when fulfilling its fiduciary duties, and an
independent board is entitled to use its business judgment to decide to enter into a
strategic transaction that promises great benefit, even when it creates certain risks.”73
Revlon does not “demand that every change in the control of a Delaware corporation be
preceded by a heated bidding contest.”74 Courts have recognized that, in general,
disinterested board decisions as to how to manage a sale process are protected by the
business judgment rule. In Mills Acquisition Co. v. Macmillan, Inc., the Delaware
Supreme Court stated that “[i]n the absence of self-interest . . . the actions of an
independent board of directors in designing and conducting a corporate auction are
protected by the business judgment rule.”75 A board approving any sale of control must
also be informed concerning the development of the transaction, alternatives, valuation
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issues and all material terms of the merger agreement. Thus, even in the change-of-
control context reviewed under Revlon’s enhanced scrutiny, a board retains a good deal
of authority to determine how to obtain the best value reasonably available to
shareholders.
Although there is no requirement that selling boards shop their companies to all
classes of potential bidders,81 Delaware courts have criticized sales processes in which
the board unreasonably failed to consider certain categories of buyers. In In re Netsmart
Technologies, Inc. Shareholders Litigation, the Court found that the board failed to fully
inform itself about possible bidders in its auction process, because management and the
company’s advisors assumed strategic buyers would not be interested and therefore
contacted only potential private equity buyers.82 The Court held that a fiduciary violation
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was likely because it found that the private equity route was favorable to management,
potentially biasing them toward such buyers.83 Because no higher bid was pending, the
Court refused to enjoin the transaction and risk losing the deal entirely, but it did require
more accurate disclosure to stockholders of the board’s decision-making process,
including its failure to contact potential strategic buyers.84 Similarly, in Koehler v.
NetSpend Holdings Inc., the Delaware Court of Chancery criticized a board’s decision to
forego a market check when the deal price was well below the low end of the bankers’
valuation, and potential private equity bidders were unable to renew discussions because
they had signed standstill agreements containing “Don’t Ask, Don’t Waive” provisions.85
Although the Court refused to enjoin the transaction and risk scuttling a premium offer,
NetSpend nonetheless serves as a reminder that boards engaging in single-bidder sales
strategies and deploying contractual features such as “Don’t Ask, Don’t Waive”
standstills must do so as part of a robust and carefully designed strategy. “Don’t Ask,
Don’t Waive” provisions are discussed in more depth in Section V.A.2.
The key thread tying these cases together is that compliance with Revlon requires
the board to make an informed decision about the path to maximizing stockholder value.
As the Delaware Supreme Court noted in Lyondell Chemical Co. v. Ryan, “there are no
legally prescribed steps that directors must follow to satisfy their Revlon duties,” and a
board’s decisions “must be reasonable, not perfect.”86
Delaware courts have found Revlon violations only in rare cases, usually
involving unusual, or unusually egregious, circumstances. In 2015, the Delaware
Supreme Court upheld the decision of the Delaware Court of Chancery to impose
substantial aiding-and-abetting liability on the lead financial advisor of the Rural/Metro
ambulance company in that company’s sale to a private equity firm.87 Such aiding-and-
abetting liability was predicated on a finding of a Revlon violation. The Court found the
sales process flawed because the company’s lead financial advisor (a) deliberately timed
the process to coincide with a strategic process involving another ambulance company to
try to obtain lucrative financing work, (b) attempted to provide staple financing to
whoever bought Rural, and (c) presented flawed valuation materials.88 The advisor did
not disclose these conflicts to the board. Indeed, the board was not aware of the financial
advisor’s efforts to provide buy-side financing to the buyer, had not received any
valuation information until a few hours before the meeting to approve the deal and did
not know that the advisor had manipulated the valuation metrics.89 Applying enhanced
scrutiny under Revlon, the Delaware Court of Chancery found that the directors had acted
unreasonably and therefore violated their fiduciary duties. The Court then held that the
financial advisor had aided and abetted this fiduciary breach and was liable for almost
$76 million in damages to the shareholders, even though the company that was sold
entered bankruptcy shortly afterward.90 On appeal, the Delaware Supreme Court
affirmed and ruled that the presence of a secondary financial advisor did not cure the
defects in the lead advisor’s work, and that the post-signing market check could not
substitute for the board’s lack of information about the transaction.91 The Rural/Metro
case is further discussed in Section III.D.
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And in 2018, the Delaware Court of Chancery found a Revlon violation in the sale
of the circuit company PLX Technology, Inc.92 The Court found that the sales process
was undermined by the conflicting interest of an activist hedge fund and its designee on
PLX’s board who vocally advocated for a near-term sale of PLX. The Court found that
the hedge fund and its designee’s conflict ultimately “undermine[d] the Board’s process
and led the Board into a deal that it otherwise would not have approved.”93 The key facts
the Court relied on in reaching this conclusion included that the Board allowed the hedge
fund to take control of the sales process and instructed management to generate lower
revenue projections so as to support a sale at the deal price.94 As in Rural/Metro, the
Court also emphasized that the Board’s decision was not fully informed, noting that the
Board agreed to the final deal price before receiving a standalone valuation of PLX, and
that the hedge fund and the company’s financial advisor failed to advise the Board that
the buyer had informed the company’s financial advisor of its plans to bid for PLX and
that it was willing to pay a higher price than PLX’s Board ultimately approved.95 The
Delaware Court of Chancery’s opinion underscores that activists who join boards must
adhere to the same fiduciary duties as other directors and must place the interests of the
company and all its stockholders above any personal, fund-specific, or short-sighted
interests.
b. Unocal
first, the board must show that it had “reasonable grounds for believing that a
danger to corporate policy and effectiveness existed,” which may be shown by
the directors’ reasonable investigation and good faith belief that there is a
threat; and
second, the board must show that the defensive measure chosen was
“reasonable in relation to the threat posed,” which in Unitrin, Inc. v. American
General Corp. the Delaware Supreme Court defined as being action that is not
“coercive or preclusive” and otherwise falls within “the range of
reasonableness.”97
Under the first prong of this test, a court may take issue with defensive action
when a board is unable to identify a threat against which it may justifiably deploy anti-
takeover efforts. For example, in Unitrin, the Court viewed the first prong of Unocal—
whether a threat to corporate policy exists—as satisfied based on the board’s conclusion
that the price offered in an unsolicited takeover bid was inadequate, although it described
the threat as “a mild one.” Unitrin also made clear that a board has discretion to act
within a range of reasonably proportional responses to unsolicited offers,98 i.e., not
limited by an obligation to act in the least intrusive way. But the board’s discretion under
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the Unocal standard is not unlimited. In the 2000 case Chesapeake Corp. v. Shore, the
Delaware Court of Chancery invalidated the board’s adoption of a supermajority voting
bylaw in the midst of a consent solicitation and tender offer, stating that Unitrin “in no
way suggests that the court ought to sanction a board’s adoption of very aggressive
defensive measures when that board has given little or no consideration to relevant
factors and less preclusive alternatives.”99
The landmark 2011 decision in Air Products & Chemicals, Inc. v. Airgas, Inc.
upheld under Unocal the Airgas directors’ decision to block a hostile tender offer by
refusing to redeem its “poison pill” shareholder rights plan. In ruling for the Airgas
board, the Court found that the directors had acted in good faith in determining that Air
Products’ “best and final” tender offer was inadequate. In making this finding, the Court
relied on the fact that the board was composed of a majority of outside directors, that the
board had relied on the advice of outside legal counsel and three separate financial
advisors, and that the three Airgas directors nominated to the Airgas board by Air
Products (and elected by the stockholders) had sided with the incumbents in concluding
that Air Products’ offer should be rejected. The Court’s opinion held that “in order to
have any effectiveness, pills do not—and cannot—have a set expiration date.”100 The
Court continued that while “this case does not endorse ‘just say never.’ . . . it does
endorse . . . Delaware’s long-understood respect for reasonably exercised managerial
discretion, so long as boards are found to be acting in good faith and in accordance with
their fiduciary duties (after rigorous judicial fact-finding and enhanced scrutiny of their
defensive actions). The Airgas board serves as a quintessential example.”101
Even in the absence of a hostile bid, deal protection devices included in friendly
merger transactions—such as termination fees, force-the-vote provisions, expense
reimbursements, and no-shop provisions—generally are reviewed under the Unocal
standard. This is because, as one Delaware Court of Chancery case put it, “[w]hen
corporate boards assent to provisions in merger agreements that have the primary purpose
of acting as a defensive barrier to other transactions not sought out by the board, some of
the policy concerns that animate the Unocal standard of review might be implicated.”102
Generally, Delaware courts will consider the effect and potentially excessive character of
“all deal protections included in a transaction, taken as a whole,” in determining whether
the Unocal standard has been met.103
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(2) its view of whether the conditions attached to Paramount’s offer introduced “a degree
of uncertainty that skewed a comparative analysis”; and (3) the issue of whether the
“timing of Paramount’s offer to follow issuance of Time’s proxy notice was . . . arguably
designed to upset, if not confuse, the Time stockholders’ vote.”104
Notably, more than one standard of review can apply to directors’ decisions
during the same transaction. For example, the approval of a friendly stock-for-stock
merger may be governed by the traditional business judgment rule, but modifications of
that transaction after the appearance of a third-party hostile bidder may be subject to the
Unocal standard.105 Similarly, the Unocal standard will continue to apply so long as a
board’s response to a third-party bid is defensive in an effort to keep the company
independent, but once a board pursues an alternative transaction that constitutes a
change-of-control, the board’s decision will generally be subject to Revlon scrutiny. As
further discussed in Section II.D below, it is not yet clear whether the deference afforded
to certain transactions under Corwin v. KKR Financial Services will be applied to board
action assessed under Unocal enhanced scrutiny.
c. Blasius
Limits on the board’s discretion under the Unocal standard are especially relevant
where “defensive conduct” affects the shareholder franchise or a proxy contest. In those
situations, courts may refer to Blasius Industries, Inc. v. Atlas Corp.,106 a decision setting
forth a standard of review that has since largely been absorbed into Unocal. In Blasius,
the directors of the target increased the size of the board so that a proxy insurgent, which
was running a short slate, could not have a majority of the board even if all of its
candidates won. The Delaware Court of Chancery invalidated the bylaw as
impermissible interference with the stockholder franchise. In Blasius, the court set forth
a standard of review requiring that a board show “compelling justification” for any
conduct whose “primary purpose” is to thwart effective exercise of the franchise. As
subsequently demonstrated in MM Companies Inc. v. Liquid Audio, Inc.,107 this standard
will apply to actions that impede the exercise of the shareholder franchise even where the
defensive actions do “not actually prevent the shareholders from attaining any success in
seating one or more nominees in a contested election” and where an “election contest
[does] not involve a challenge for outright control of the board.”108 On the other hand,
Delaware courts are reluctant to apply Blasius review outside the context of board
elections, stressing that “the reasoning of Blasius is far less powerful when the matter up
for consideration has little or no bearing on whether the directors will continue in
office.”109
Over time, Delaware courts have suggested that the “compelling justification”
standard of Blasius need not serve as an independent standard of review, but could
instead exist as a stricter application of the Unocal framework.110 Delaware courts have
also suggested that situations in which Blasius would apply can simply be subjected to a
faithful application of Unocal review, which is sufficiently stringent if properly
applied.111 Consequently, defensive conduct affecting the shareholder franchise is
probably best viewed as triggering a particularly careful Unocal analysis.
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3. Entire Fairness
when the board breaches its duty of care and the directors are not exculpated
from liability under DGCL 102(b)(7);113
when a majority of the board has an interest in the decision or transaction that
differs from the stockholders in general;114
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Entire fairness review can be triggered even though a majority of directors are
disinterested if the conflicted directors control or dominate the board, or if one or more of
the conflicted directors failed to disclose his or her interest “and a reasonable board
member would have regarded the existence of the material interest as a significant fact in
the evaluation of the proposed transaction.125
The concept of entire fairness has two basic aspects: fair dealing and fair
price. [Fair dealing] embraces questions of when the transaction was
timed, how it was initiated, structured, negotiated, disclosed to the
directors, and how the approvals of the directors and the stockholders were
obtained. [Fair price] relates to the economic and financial considerations
of the proposed merger, including all relevant factors: assets, market
value, earnings, future prospects, and any other elements that affect the
intrinsic or inherent value of a company’s stock.127
A fair price does not mean the highest price financeable or the highest
price that fiduciary could afford to pay. At least in the non-self-dealing
context, it means a price that is one that a reasonable seller, under all of
the circumstances, would regard as within a range of fair value; one that
such a seller could reasonably accept.128
1. Controlling Stockholders
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control such that the stockholder could be deemed to have effective control of the board
without actually owning a majority of stock.”129 To plead that a stockholder is a
controller despite controlling less than a majority of the company’s voting power, a
plaintiff must allege facts showing “actual domination and control” over the board by the
minority stockholder, either generally or with respect to the challenged transaction.130
Where control over a transaction is alleged, it must be established “that the defendant
exercised ‘actual control with regard to the particular transaction that is being
challenged.’”131 Delaware decisions have also emphasized that a minority stockholder is
only properly held to be a controlling stockholder where its voting power is nevertheless
significant enough to make the stockholder “the dominant force in any contested . . .
election,” even “without having to attract much, if any, support from public
stockholders.”132
The Court may also look to contractual rights or restrictions that enhance or limit
a stockholder’s voting power. For example, in Williamson v. Cox Communications, Inc.,
the Court denied a motion to dismiss where the complaint alleged that a group of
stockholders with a combined 17.1% stake was a control group in light of the group’s
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board-level appointment rights and certain charter provisions, which together effectively
granted the stockholder group veto power over all decisions of the board of directors.139
In contrast, in Sciabacucchi v. Liberty Broadband Corp., the Delaware Court of
Chancery found it was not reasonably conceivable that a 26% stockholder in that case
could be a controller because, among other reasons, a stockholders agreement prevented
that stockholder from accumulating a stake greater than 35%, designating more than four
of the company’s 10 directors, or soliciting proxies or consents.140
In addition, the Court may consider that two or more minority stockholders acting
together could constitute a control group where they otherwise would not individually. In
In re Hansen Medical, Inc. Stockholders Litigation, the Delaware Court of Chancery
declined to grant a motion to dismiss on the basis that plaintiff stockholders had
sufficiently pleaded a “reasonably conceivable” claim that two constituent groups holding
34% and 31% of the company’s stock, respectively, together constituted a control group,
on the basis of their 21-year history of investment cooperation and coordination.144
Similarly, in Garfield v. BlackRock Mortgage Ventures, LLC, the Delaware Court of
Chancery concluded that two stockholders that held 46% of the company’s voting stock,
certain blocking rights, and the right to designate a total of 4 out of 11 directors,
constituted a control group based on the allegations that the two stockholders were the
company’s founding sponsors, that they had invested together in the company for ten
years, and that management had met jointly with them to negotiate the challenged
transaction.145
On the other hand, in Sheldon v. Pinto Technology Ventures, L.P., the Delaware
Supreme Court affirmed the Delaware Court of Chancery’s finding that three venture
capital funds holding 60% of the company’s stock did not constitute a control group,
holding that “a mere concurrence of self-interest among certain stockholders” without
“some indication of an actual agreement” is insufficient to establish a control group.146
The Delaware Supreme Court noted that the venture capital funds’ voting agreement did
not require them to vote together on any transaction, and their prior interactions in other
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investments “merely indicate that venture capital firms in the same sector crossed paths
in a few investments.”147
The standard for control sets a high bar, but certain recent case law has tended to
focus less on voting power and more on other factors, and transaction planners should
accordingly consider carefully whether a minority stockholder with a relatively small
voting stake could be at risk of facing Court-imposed controlling stockholder
obligations.148
With respect to process, the Delaware Supreme Court has long encouraged boards
to utilize a “special committee” of independent directors when a conflict transaction is
proposed. As discussed at greater length below, the purpose of a special committee is to
reproduce the dynamics of arm’s-length bargaining. To be effective, a special committee
generally should: (1) be properly constituted (i.e., consist of independent and
disinterested directors); (2) have an appropriately broad mandate from the full board
(e.g., not be limited to simply reviewing an about-to-be-agreed-to transaction); and
(3) have its own legal and financial advisors.156 The use of a well-functioning special
committee shifts the burden of proof regarding entire fairness from the defendant to the
plaintiff, thus requiring plaintiff to prove that a transaction was not entirely fair, rather
than requiring defendant to prove that it was entirely fair. The quantum of proof needed
under entire fairness is a “preponderance of the evidence,” which has led the Delaware
Supreme Court to note that the effect of a burden shift is “modest,” as it will only prove
dispositive in the rare instance where the evidence is entirely in equipoise.157
Nevertheless, the Delaware Supreme Court has also stressed that it views the use of
special committees as part of the “best practices that are used to establish a fair dealing
process,” and thus special committees remain important in conflict transactions.158 And,
in light of M&F Worldwide, explained in detail in Section II.D.2 below, a controller’s
agreement in advance to “voluntarily relinquish[] its control” by conditioning a
transaction “upon the approval of both an independent, adequately empowered Special
Committee that fulfills its duty of care, and the uncoerced, informed vote of a majority of
the minority stockholders” will result in the application of business judgment review
rather than entire fairness review.159 Factors considered in determining whether a special
committee functioned adequately are further described below. It bears noting that
approval of a take-private merger with a controlling shareholder by a majority of the
minority shareholders also shifts the burden of proof, provided that the disclosures to the
shareholders are deemed sufficient.
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Decisions of the Delaware courts have repeatedly emphasized the need for the
members of a special committee to be independent of the transaction proponent, well
informed, advised by competent and independent legal and financial advisors, and
vigorous in their negotiations of the proposed transaction.160
Special committees are only effective to impact the standard of review and/or the
burden of proof if their members are disinterested and independent. In determining
director independence and disinterestedness, a board should have its directors disclose
their compensatory, financial and business relationships, as well as any significant social
or personal ties that could be expected to impair their ability to discharge their duties.
The Delaware Supreme Court has stressed that all of these factors must be considered “in
their totality and not in isolation from each other.”161 Paying close attention to which
directors are selected to serve on a special committee is important, and care should be
taken to vet the independence of those selected.162 The use of a special committee will
not shift the burden of proving unfairness to the plaintiffs if the directors on the
committee are viewed as “beholden” to a controlling stockholder.163 Even if a director
does not have a direct personal interest in the matter being reviewed, the director will not
be considered qualified if he or she lacks independence from the controlling stockholder
or some other person or entity that is interested in the transaction.
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in Cumming also found that another director lacked independence from the same
interested party because that director had been invited by the interested party to join an
ownership group of a professional basketball team.170 Additionally, in In re Oracle Corp.
Derivative Litigation decision, the Delaware Court of Chancery found that a director
lacked independence from founder and 28% stockholder Lawrence Ellison based on the
director’s “multiple layers of business connections with Oracle,” including being
“affiliated with two venture capital firms that operate in areas dominated by Oracle.”171
The Court found that those connections, combined with the “rather lucrative” director
fees that would be jeopardized if the director sued Ellison, were sufficient to discredit the
director’s independence.172 Although some of these cases involved the demand futility
framework rather than the assessment of a special committee’s independence, they reflect
a trend in the Delaware courts that may suggest closer scrutiny of business, social, or
financial relationships between board members.
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b. The Committee’s Role and Process
If directors who have a personal interest that conflicts with those of the public
stockholders constitute a minority of the board, the disinterested majority can act for the
board, with the interested members abstaining from the vote on the proposal. But if a
majority of the board is not disinterested, under Delaware law, absent appropriate
procedural protections, the merger will be reviewed under the “entire fairness” standard,
with the burden of proof placed on the board.182
The need for a special committee may shift as a transaction evolves. Acquirors
that begin as third-party bidders may become affiliated with management directors, or
management may organize and propose a management buyout in response to an
unsolicited bid from a third party. Throughout a sale process, the board and its advisors
must be aware of any conflicts or potential conflicts that arise. Failure to disclose such
conflicts may result in substantial difficulties in defending the board’s actions in court.183
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the majority stockholder controlled the process and allegedly had interests divergent from
those of the public stockholders.
The special committee should have a clear conception of its role, which should
include a power to say no to the potential transaction.190 In Southern Peru,191 the
Delaware Court of Chancery criticized the role of the special committee in reviewing a
merger proposal from a controlling stockholder. The Court stated that the special
committee’s “approach to negotiations was stilted and influenced by its uncertainty about
whether it was actually empowered to negotiate” and that the special committee “from
inception . . . fell victim to a controlled mindset and allowed [its controlling stockholder]
to dictate the terms and structure of the [m]erger.”192 The Delaware Supreme Court
affirmed the Delaware Court of Chancery’s rulings and adopted its reasoning.193 Indeed,
the Delaware Court of Chancery has held, on a motion to dismiss, that in some
circumstances, the failure to employ a pill, together with other suspect conduct, can
support a claim for breach of the duty of loyalty.194 A special committee that does not
recognize, even in the context of a takeover bid by a controlling stockholder, that it may
refuse to accept the offer might bear the burden of proving the entire fairness of the
transaction in court.195 The ability to say no must include the ability to do so without fear
of retaliation. In Lynch, the Delaware Supreme Court was persuaded that the special
committee’s negotiations were influenced by the controlling stockholder’s threat to
acquire the company in a hostile takeover at a much lower price if the special committee
did not endorse the controlling stockholder’s offer.
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notwithstanding “blemishes, even flaws” early in the deal process, including retributive
threats and vote-buying by Sprint.197 The Court noted that minority stockholders’
opposition to Sprint’s initial offer and the special committee’s engagement with a
competing buyer “freshened the atmosphere and created a competitive dynamic,” which
ultimately resulted in a higher price for Clearwire.198
Special committees and their advisors should be proactive in seeking all relevant
information (potentially including valuation information and information held by
management or the transaction proponent) and in negotiating diligently on behalf of
stockholders.199 The records of the deliberations of a special committee and the full
board should reflect careful and informed consideration of the issues.200
The best practice is for the special committee itself, rather than management or a
controlling stockholder, to choose its own financial and legal advisors. In Macmillan, the
Delaware Supreme Court was critical of the conduct of an auction to sell the company in
which a financial advisor selected by the company’s CEO, rather than by the special
committee, played a dominant role.201 In In re Tele-Communications, Inc. Shareholders
Litigation,202 Chancellor Chandler found that the special committee’s decision to use the
company’s legal and financial advisors rather than retaining independent advisors
“raise[d] questions regarding the quality and independence of the counsel and advice
received.” And in 2006 in Gesoff v. IIC Industries Inc.,203 Vice Chancellor Lamb
strongly criticized a special committee’s use of advisors who were handpicked by the
majority stockholder seeking a merger.
Whether the special committee should retain advisors with a previous relationship
with the corporation is a context-specific decision. While having a special committee
advised by firms that have close ties to the company may raise independence concerns, it
is not in all cases better for the special committee to choose advisors who are unfamiliar
with the company or to avoid hiring advisors who have done prior work for the company.
In one case, Justice Jacobs (sitting as a Vice Chancellor) criticized a process in which the
company’s historical advisors were “co-opted” by the majority stockholder, leaving the
special committee with independent advisors who did not know the company well and
who lacked the information available to the majority stockholder’s advisors.204
As a practical matter, some companies may have had at least some prior dealings
with close to all of the financial or legal advisors who would have the relevant experience
and expertise to advise a special committee on a transaction that is particularly
complicated or of a certain size. If the special committee chooses to engage an advisor
with such prior dealings, it should carefully document any potential conflict, the reasons
the special committee considered it important to engage the advisor, and the measures the
special committee took to mitigate any such conflict. Such measures may include
negotiating carefully worded confidentiality provisions and structuring the advisor’s fee
to prevent any misaligned incentives. The committee may also choose to hire a second
advisor for a particular role, although it should take care to ensure that the second
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advisor’s presence will successfully mitigate the conflict that has been identified—for
example, by ensuring that the new advisor is not merely a “secondary actor,” and by not
compensating it on a contingent basis.205 Interviewing several advisors, and ensuring a
record of such through board and committee minutes, will also help to show that a special
committee was aware of its options and made an informed decision in hiring its advisors,
without delegating the decision to management.
The renewed interest in this rule began with Corwin v. KKR Financial Holdings
LLC, where the Delaware Supreme Court held that “the business judgment rule is
invoked as the appropriate standard of review for a post-closing damages action when a
merger that is not subject to the entire fairness standard of review has been approved by a
fully informed, uncoerced majority of the disinterested stockholders.”207 In doing so, the
Court rejected plaintiffs’ argument that enhanced scrutiny under Revlon should apply,
noting that Delaware’s longstanding policy has been to avoid second-guessing the
decisions of informed, disinterested, and uncoerced stockholders.208 The Delaware
Supreme Court further clarified that the cleansing effect of stockholder approval applied
regardless of whether the stockholder vote was held on a voluntary basis or was
statutorily required to complete the transaction.209
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Section 251(h) of the DGCL would result in the same cleansing effect as a stockholder
vote.210
Later rulings have clarified Corwin’s exception for transactions that are “subject
to the entire fairness standard of review.” In Larkin v. Shah, the Delaware Court of
Chancery held that, if fully informed, uncoerced and disinterested stockholders approve a
transaction under Corwin, the business judgment rule irrebuttably applies in the absence
of a conflicted controlling stockholder.214 Consequently, even if the business judgment
presumption could have been rebutted because a board was alleged to lack a disinterested
and independent majority, stockholder approval will cleanse the transaction and shield it
from judicial scrutiny, provided that there is no conflicted controller.215
Corwin will not apply if the stockholders’ vote was not fully informed. The
plaintiff bears the initial burden of adequately pleading a material omission or
misstatement.216 If the plaintiff is successful, the defendant will bear the burden of
proving that the vote was fully informed.217 In order for the stockholders’ vote to be
viewed as fully informed, stockholders must be apprised of all material facts regarding
the transaction.218 Although the preference of the Delaware Court of Chancery is to
consider disclosure claims before closing so as to provide equitable relief that could lead
to a fully informed vote,219 it remains to be seen whether the failure to bring such
disclosure claims before closing can prevent a plaintiff from later using them to
circumvent Corwin by pleading that stockholder approval was not fully informed.220
The vote also must not be coerced for business judgment deference under Corwin
to be granted. Coercion and control are related inquiries, because “coercion is assumed,
and entire fairness invoked, when the controller engages in a conflicted transaction,
which occurs when a controller sits on both sides of the transaction, or is on only one side
but ‘competes with the common stockholders for consideration.’”226
However, recent cases have suggested that coercion can also occur outside the
control context. In Sciabacucchi v. Liberty Broadband Corp., although the Court held
that no controlling stockholder was present, it found it reasonably conceivable that the
transactions being challenged had been approved through a structurally coercive
stockholder vote sufficient to prevent the use of a Corwin defense.227 The Court
explained that a structurally coercive vote is “a vote structured so that considerations
extraneous to the transaction likely influenced the stockholder-voters, so that [the Court]
cannot determine that the vote represents a stockholder decision that the challenged
transaction is in the corporate interest.”228 The Court found that certain value-enhancing
transactions had been conditioned on the approval of the challenged transactions, and that
the challenged transactions therefore had not been evaluated solely on their own merit.229
In In re Saba Software, Inc. Stockholder Litigation, the Delaware Court of Chancery
similarly refused to grant business judgment deference under Corwin after finding it
reasonably conceivable that the stockholder vote was structurally coerced because
stockholders were presented with a “Hobson’s choice” between approving the merger in
question or holding shares that had recently been de-listed as a result of the company’s
inexplicable and repeated failure to restate its financials.230
The Corwin doctrine reflects the powerful but simple principle that the informed
judgment of stockholders who control the corporate vote is entitled to deference, and the
Delaware courts have stressed that the doctrine was intended to “avoid judicial second-
guessing” about the economic merits of a transaction but “was never intended to serve as
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a massive eraser, exonerating corporate fiduciaries for any and all of their actions or
inactions preceding their decision to undertake a transaction for which stockholder
approval is obtained.”231 The Delaware Court of Chancery has also recently clarified that
Corwin is not intended to restrict stockholders’ rights to obtain books and records under
8 Del. C. § 220, noting that the fact that defendants may seek to dismiss a challenge to a
transaction under Corwin does not inhibit stockholders from seeking books and records
regarding the challenged transaction, which the stockholders may use to attempt to
overcome a Corwin defense.232
Finally, although it appears that the Corwin doctrine can apply to transactions that
would otherwise have been subject to enhanced scrutiny under Revlon or to transactions
that would otherwise be subject to entire fairness review, the Delaware Court of
Chancery has not yet opined on whether Corwin can shield transactions challenged as
preclusive and coercive under Unocal. In In re Paramount Gold & Silver Corp.
Stockholders Litigation, the Delaware Court of Chancery noted potential tension in that
regard between the Delaware Supreme Court’s earlier decision in In re Santa Fe Pacific
Corp. Shareholder Litigation, where the Court held that a fully informed stockholder vote
approving a transaction did not preclude judicial review of certain deal protection devices
under Unocal, and the more recent Corwin doctrine, but declined to address the question,
finding instead that the agreement in question was not a deal protection device and thus
did not implicate Unocal analysis in the first instance.233
Since the 2014 Delaware Supreme Court’s decision in Kahn v. M&F Worldwide
Corp., a controlling stockholder has been able to obtain business judgment review
treatment if it and the board follow specific requirements. As described below, although
M&F Worldwide addressed a “squeeze-out” merger, the Delaware Court of Chancery has
held that the standard applies to other conflict transactions and third-party sales involving
a controlling stockholder, as well.234 To qualify for business judgment review, the
following conditions must be satisfied: “(i) the controller conditions the procession of
the transaction on the approval of both a Special Committee and a majority of the
minority stockholders; (ii) the Special Committee is independent; (iii) the Special
Committee is empowered to freely select its own advisors and to say no definitively;
(iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote
of the minority is informed; and (vi) there is no coercion of the minority.”235 Moreover,
the conditions of approval by a Special Committee and by a majority of the minority
stockholders must apply to the proposed transaction from the outset.236 The Court in
M&F Worldwide also noted that the proper use of either special committee or majority-
of-the-minority approval alone “would continue to receive burden-shifting within the
entire fairness standard of review framework.”237
The Delaware Court of Chancery has applied the M&F Worldwide standard on a
motion to dismiss in multiple cases. For example, in In re Books-A-Million Stockholders
Litigation, the Court discussed the effect of pleading bad faith in an M&F Worldwide
context, opining that successfully pleading bad faith would suffice to rebut the business
judgment rule under the framework.241 The Court rejected the plaintiffs’ argument that
the Special Committee’s decision to take a lower-priced offer from the controlling
stockholder rather than a comparable, higher-priced offer from a third party, was
indicative of bad faith by the committee, reasoning that the controller’s offer was of a
different nature because it already possessed control, while a third party would be
expected to pay a premium for control.242 Furthermore, the controlling stockholder was
not obliged to become a seller, nor was the Special Committee required to deploy
corporate powers to attempt to force the controller to sell.243 Finding no reasonably
conceivable inference of bad faith or that the M&F Worldwide conditions were not met,
the Court applied the business judgment rule and dismissed the case. In contrast, in
Arkansas Teacher Retirement System v. Alon USA Energy, Inc., the Delaware Court of
Chancery declined to apply the M&F Worldwide framework, despite the special
committee and majority-of-the-minority requirements being imposed before the first
formal offer.244 Following the Olenik decision described above, the Court found that
meetings from the previous six months to discuss potential deal structures and exchange
ratios were “substantive in nature” and thus prevented the application of M&F
Worldwide.245
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package was alone insufficient to restore the business judgment rule to the board’s
approval of the package.249
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III.
1. Confidentiality Agreements
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than holding back, knowing they can overbid the auction winner later. Because of the
effect such a provision may have, the Delaware courts have indicated that they would
expect a board to include it only after careful consideration of its impact. These
provisions and the developments in Delaware case law on this issue are discussed in
Section V.A.2.
Since Vulcan, parties have generally focused more closely on making clear the
extent, if any, to which the confidentiality agreement should be interpreted to prevent a
hostile bid by one of the parties. For example, potential acquirors will sometimes add
language to a confidentiality agreement’s standstill provision that expressly permits the
acquiror, following the expiration or termination of the standstill period, to take some, or
all, of the actions previously prohibited by the standstill notwithstanding any other
restrictions contained in the confidentiality agreement. This is intended to deal with the
use and disclosure restrictions, which do not typically terminate when the standstill does.
Targets sometimes push back, or agree to a limited version of this construct.
Parties should also consider how confidentiality and use obligations may restrict a
party in future M&A activity when a confidentiality agreement is or may be deemed to
have been assigned to a third party after an acquisition. In 2015, a California court in
Depomed Inc. v. Horizon Pharma, PLC251 preliminarily enjoined a hostile bidder on the
ground that it misused information in violation of a confidentiality agreement, effectively
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ending the hostile takeover attempt. Unlike in Vulcan, the confidentiality agreement at
issue was not signed directly between the parties that ultimately became involved in
litigation. Instead, in 2013, Horizon, while pursuing a co-promotion arrangement
concerning a particular drug asset owned by Janssen Pharmaceuticals, Inc., signed a
confidentiality agreement with Janssen containing customary provisions limiting
Horizon’s permitted use of Janssen proprietary information solely to evaluating
Horizon’s interest in pursuing a business relationship with Janssen. Without signing a
new confidentiality agreement, Horizon later participated in an auction process that
Janssen ran for the drug asset. Depomed also participated, winning the auction and
acquiring the U.S. rights to the drug asset. Two years later, Horizon launched a hostile
bid for Depomed, which sued for injunctive relief, asserting that Horizon was improperly
using information relating to the drug asset in evaluating and prosecuting its hostile bid.
In a ruling applying the plain terms of the agreement, the court rejected arguments that
the confidentiality agreement only applied to the earlier co-promotion transaction
structure. The court concluded that it was likely that Depomed had acquired the right to
enforce the confidentiality restrictions against Horizon, noting that “a different
conclusion would be illogical as it would mean that Depomed could not protect the
confidential information” about its newly acquired asset.252 The court held that Horizon
had misused confidential information in formulating its takeover proposal, and Horizon
withdrew its bid the following day. Depomed is a further reminder that parties should
generally be aware of the obligations contained in confidentiality agreements, especially
where assignment, including as a result of a transaction involving the party protected by
the confidentiality agreement, can transform the nature of the original obligation and
cause unanticipated limitations on future strategic opportunities. Such agreements should
be carefully reviewed by counsel before execution.
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2. Letters of Intent
Even when executed by the parties, most provisions of a letter of intent are non-
binding, although some provisions are expressly intended to be binding (for example, the
grant of an exclusivity period or an expense reimbursement or confidentiality provision).
It is essential that the parties are clear as to whether, and to what extent, a letter of intent
is intended to be binding and enforceable.254 Because they are cursory in nature, letters
of intent typically state that the parties will only be bound upon execution of definitive
agreements. The absence of such language could lead a court to hold the letter of intent
enforceable. For example, the Delaware Court of Chancery ruled in a 2009 bench
decision on a motion for a temporary restraining order that a jilted bidder had asserted
colorable claims that a target had breached the no-shop/exclusivity and confidentiality
provisions of a letter of intent, as well as its obligation to negotiate in good faith.255 In
reaching its decision, the Court stated that parties that wish to enter into non-binding
letters of intent can “readily do that by expressly saying that the letter of intent is non-
binding,” and that contracts “do not have inherent fiduciary outs”—points that
practitioners representing sellers should keep in mind from the outset of a sale process.256
Even where express language that a letter of intent is non-binding is present, there
may be other facts and circumstances that could lead a court to determine that the way the
letter of intent is used makes it binding. In SIGA Technologies, Inc. v. PharmAthene,
Inc., SIGA and PharmAthene negotiated a licensing agreement term sheet (the “LATS”)
that was unsigned and had a footer on both pages stating “Non-Binding Terms.”257 The
LATS was later attached by the parties to a merger agreement and a loan agreement, both
of which provided that if the merger agreement was terminated, the parties would
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nevertheless negotiate a licensing agreement in good faith in accordance with the terms
of the LATS. After terminating the merger agreement, SIGA claimed that the LATS was
non-binding and attempted to negotiate a licensing agreement with economic terms
“drastically different and significantly more favorable to SIGA”258 from those in the
LATS. The Delaware Supreme Court affirmed the Delaware Court of Chancery’s
finding, ruling that the incorporation of the LATS into the merger agreement reflected
that the parties had agreed to an enforceable commitment to negotiate in good faith.259
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1. Formal Auction
2. Market Check
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“no-shop” provision and the “fiduciary out,” new bidders must take the first step of
declaring their interest after hearing about the transaction.
A board may discharge its fiduciary duties by selling a company through a single-
bidder negotiation coupled with a post-signing, passive market check, even in a Revlon
transaction. Although this method is more likely to be closely scrutinized by courts, it is
permissible so long as the board is informed of the downsides of this approach and has an
appropriate basis for concluding that they are outweighed by the benefits, and the
transaction provides sufficient opportunity for competing bids to emerge. In 2011, Vice
Chancellor Parsons ruled in In re Smurfit-Stone that an active market check was
unnecessary because the selling company had been “in play” both during and after its
bankruptcy, yet no competing offers were made.265 Similarly, in the Fort Howard case in
1988, which was reaffirmed by the Delaware Supreme Court in C&J Energy
Servs., Inc. v. City of Miami Gen. Emps.’ Ret. Trust in 2014, Chancellor Allen ruled that
the company’s directors had satisfied their fiduciary duties in selling the company by
negotiating for an approximately month-and-a-half-long period between the
announcement of the transaction and the closing of the tender offer in which new bidders
could express their interest.266 The Chancellor ruled that the market check was not
“hobbled” by deal protection measures and noted that he was “particularly impressed
with the announcement [of the transaction] in the financial press and with the rapid and
full-hearted response to the eight inquiries received.”267
The Delaware Court of Chancery has provided valuable guidance for sellers
considering forgoing an active market check. In In re Plains, Vice Chancellor Noble
found that the directors were experienced in the industry and had “retained ‘significant
flexibility to deal with any later-emerging bidder and ensured that the market would have
a healthy period of time to digest the proposed transaction.’”268 When no competing bids
surfaced in the five months after the merger was announced, the Plains board could feel
confident it had obtained the highest available price. In contrast with Plains, in
Koehler v. NetSpend, Vice Chancellor Glasscock criticized the NetSpend board’s failure
to perform a market check, given the other facts surrounding the merger.269 NetSpend’s
suitor entered into voting agreements for 40% of the voting stock and bargained for
customary deal protections in the merger agreement, including a no-shop, a 3.9%
termination fee and matching rights. The merger agreement also prohibited the NetSpend
board from waiving “Don’t Ask, Don’t Waive” standstills that NetSpend had entered into
with two private equity firms that had previously expressed an interest in investing in the
company, but had not been part of a pre-signing auction or market check. Even though
the record showed that the investment bank advising NetSpend’s board had advised that a
private equity bidder was unlikely to match the buyer’s offer, Vice Chancellor Glasscock
found that, by agreeing to enforce the “Don’t Ask, Don’t Waive” standstills, the
NetSpend board had “blinded itself” to the two most likely sources of competing bids
and, moreover, had done so without fully understanding the import of the standstills.270
This, combined with reliance on a “weak” fairness opinion and an anticipated short
period before consummation, led Vice Chancellor Glasscock to conclude that the sales
process was unreasonable.271 Plains and NetSpend reinforce that the terms of a merger
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agreement and its surrounding circumstances will be viewed collectively, and, in the
Revlon context, the sales process must be reasonably designed to obtain the highest price.
c. Go-Shops
Some acquirors do not necessarily welcome go-shops not only because they have
heightened sensitivity to encouraging competitors to become interlopers, but because
their interest in the target is strategic, meaning that receiving a break-up fee is usually a
suboptimal outcome. However, strategic deals have also seen some tailored variations on
go-shop provisions, such as carving out pre-existing bidders from the no-shop provision
and providing for a reduced break-up fee with respect to deals pursued with these
bidders, or just generally coupling a no-shop with a lower break-up fee for a specified
period of time (for example, the Pfizer/Wyeth deal).
The board, in exercising its business judgment as to the appropriate form and
valuation of transaction consideration, may rely on experts, including investment
bankers, in reaching an informed view. In Delaware, Section 141(e) of the DGCL
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provides protection from personal liability to directors who rely on appropriately
qualified advisors. A board is entitled to rely on the expert advice of the company’s
financial advisors “who are selected with reasonable care and are reasonably believed to
be acting within the scope of their expertise,” as well as on the advice and analyses of
management.275 In merger transactions, an investment banker’s unbiased view of the
fairness of the consideration to be paid and the related analyses provide a board with
significant information with which to evaluate a proposed transaction. Since Delaware’s
1985 Smith v. Van Gorkom decision, it has been common in a merger transaction
involving a public company for a fairness opinion to be rendered to the board of the seller
(and, sometimes, to the buyer). The analyses and opinions presented to a board,
combined with presentations by management and the board’s own long-term strategic
reviews, provide the key foundation for the exercise of the directors’ business
judgment.276 Courts reviewing the actions of boards have commented favorably on the
use by boards of investment bankers in evaluating merger and other transaction proposals
(although generally receipt of a fairness opinion by independent investment bankers is
not required as a matter of law).277 In transactions subject to the federal proxy rules, the
SEC staff also requires detailed disclosure of the procedures followed by an investment
banker in preparing a fairness opinion, including a summary of the financial analyses
underlying the banker’s opinion and a description of any constraints placed on those
analyses by the board. The additional detailed disclosure obligations of Rule 13e-3 under
the Exchange Act, which applies to “going private” transactions between issuers and their
affiliates, also means that reports, opinions and appraisals materially related to the Rule
13e-3 transaction prepared by outside financial advisors in such transactions should be
prepared with the understanding that they may be required to be disclosed to the SEC and
publicly filed.
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Great care should be exercised by investment bankers in preparing the analyses
that support their opinions and in the presentation of such analyses to management and
the board, and boards should exercise care in determining what analyses to disclose in
proxy or tender offer materials. Recent decisions indicate that the scope of potential
liability under the federal securities laws and Delaware law for disclosure violations may
be broader than previously thought. In April 2018, the U.S. Court of Appeals for the
Ninth Circuit ruled that in the tender offer context, Section 14(e) of the Exchange Act
does not require scienter for violation, but rather a lower standard of negligence.278 This
ruling arose in the context of a buyout of a public company by tender offer, where a
shareholder class action alleged that the failure by the target to include a summary of its
investment bank’s comparable transaction premium analysis was a material omission that
violated Section 14(e). By contrast, the Second, Third, Fifth, Sixth and Eleventh Circuits
have held that Section 14(e) requires a showing of scienter. In January 2019, the U.S.
Supreme Court granted certiorari on the Ninth Circuit holding and its deviation from the
holdings of the other Circuits, but then dismissed the writ of certiorari as being
improvidently granted in April 2019, leaving a circuit split. In Delaware, the Delaware
Court of Chancery found in In re PLX Technology Inc. Stockholders Litigation that the
board breached its fiduciary duty by failing to disclose in its proxy materials the results of
a discounted cash flow analysis commissioned by a special committee of the board that
was otherwise partially described in the proxy materials; specifically, the proxy materials
discussed how the special committee had requested a discounted cash flow analysis,
which had been received and discussed by the board, but the proxy materials did not
disclose the actual results of the discounted cash flow analysis.279 The Delaware Court of
Chancery found that although the omitted information may not have been independently
material, once the proxy materials disclosed that an analysis was performed, the omission
of the results of the analysis was a misleading partial disclosure.280
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disclosure-related case law favorable to corporate defendants, but as the foregoing case
suggests, such plaintiffs will have to show that the supplemental disclosures were
material in the first place.
The wording of the fairness opinion and, as illustrated by these cases, the scope of
related proxy statement and tender offer disclosures must be carefully drafted to
accurately reflect the nature of the analyses underlying the opinion and the assumptions
and qualifications upon which it is based.282
It is important that banks and boards take a proactive role in encouraging the
disclosure and management of actual or potential conflicts of interest both at the board
level and among the board’s advisors. In recent years, there has been a significant focus
on financial advisor conflicts. As noted in In re El Paso, banks should faithfully
represent their clients and disclose fully any actual or potential conflicts of which they are
aware so that such conflicts can be managed appropriately.283
Though boards cannot know and do not have a responsibility to identify every
conflict their financial advisors may have, they should seek to ensure that these conflicts
are brought to light as they arise throughout the transaction process, and to appropriately
manage any such conflicts. These steps are vital to banks and boards avoiding liability
from banker conflicts and failed disclosure. In the absence of disclosure and
management of conflicts, among other results, a board may be found to have breached its
fiduciary duty, the deal could be delayed, and deal protections could be compromised.
Courts and the SEC will scrutinize perceived conflicts of interest by the
investment bank rendering the fairness opinion. Since 2007, FINRA’s rules have
required specific disclosures and procedures addressing conflicts of interest when
member firms provide fairness opinions in change-of-control transactions.284 FINRA
requires disclosure in the fairness opinion as to, among other things, (1) whether or not
the fairness opinion was approved or issued by a fairness committee, (2) whether or not
the fairness opinion expresses an opinion regarding the fairness of the amount or nature
of the compensation to be received in such transaction by the company’s officers,
directors, employees or class of such persons, relative to the compensation to be received
in such transaction by the shareholders, (3) whether the compensation that the member
firm will receive is contingent upon the successful completion of the transaction, for
rendering the fairness opinion and/or serving as an advisor, (4) whether any other
significant payment or compensation is contingent upon the completion of the transaction
and (5) any material relationships that existed during the past two years or that are
mutually understood to be contemplated in which any compensation was received or is
intended to be received as a result of the relationship between the member and any party
to the transaction that is the subject of the fairness opinion.285 Disclosure about previous
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relationships between the investment banker and the parties to the transaction is also
required.
The Delaware courts have also had a voice in deciding what constitutes a conflict
of interest on the part of financial advisors to a transaction. For example, although
FINRA does not ban the practice of contingent fee arrangements for financial advisors, in
some circumstances, certain contingent fee arrangements will cause Delaware courts to
find triable issues of bias. In In re Tele-Communications, Inc. Shareholders Litigation,
the Court held that the fact that the fairness opinion rendered by a special committee’s
financial advisor was given pursuant to a contingent fee arrangement—$40 million of the
financial advisor’s fee was contingent on the completion of the transaction—created “a
serious issue of material fact, as to whether [that advisor] could provide independent
advice to the Special Committee.”286 Although certain contingent fee arrangements in
specific factual contexts have been questioned by the Delaware courts, contingent fee
arrangements generally “ha[ve] been recognized as proper by [the] courts,”287 as they
“provide an incentive for [the investment bank] to seek higher value.”288
The role of managing conflicts of interest is not limited to investment banks, and
oversight over potential conflicts is within the scope of a board’s fiduciary duties. In an
important decision concerning the role played by outside financial advisors in the board’s
decision-making process, the Delaware Court of Chancery held in 2011 that a financial
advisor was so conflicted that the board’s failure to actively oversee the financial
advisor’s conflict gave rise to a likelihood of a breach of fiduciary duty by the board. In
In re Del Monte Foods Co. Shareholders Litigation,289 the Court found that after the Del
Monte board had called off a process of exploring a potential sale, its investment bankers
(1) continued to meet with several of the bidders—without the approval or knowledge of
Del Monte—ultimately yielding a new joint bid from two buyout firms, (2) sought and
received permission to provide financing to the bidders for a substantial fee before the
parties had reached agreement on price and (3) ran Del Monte’s go-shop process. The
Court faulted the board and bankers for the foregoing actions and stated that, although
“the blame for what took place appears at this preliminary stage to lie with [the bankers],
the buck stops with the Board,” because “Delaware law requires that a board take an
active and direct role in the sale process.”290 The case ultimately settled for $89 million,
with the investment bank bearing roughly a quarter of the cost. In 2014, in In re Rural
Metro Corp. Stockholders Litigation,291 the Delaware Court of Chancery found that
Royal Bank of Canada aided and abetted fiduciary duty violations of the board of
directors of Rural/Metro Corporation in its sale of the company to a private equity firm.
The Court noted that, while negotiating on behalf of the board, RBC never disclosed to
the Rural board that RBC was lobbying the private equity firm to allow RBC to
participate in buy-side financing. RBC was found to have failed to disclose certain
critical information to the board and the Court concluded that “RBC knowingly
participated in the Board’s breach of its duty of care by creating the informational
vacuum that misled the Board,” in part, by revising its valuation of Rural downward so as
to make it appear that the private equity firm’s offer was fair to and in the best interests of
Rural’s shareholders.292
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In 2015, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s
ruling in Rural Metro, but emphasized that its holding was “a narrow one that should not
be read expansively to suggest that any failure on the part of a financial advisor to
prevent directors from breaching their duty of care gives rise to a claim for aiding and
abetting a breach of the duty of care”293 and provided clarification on the practical steps
boards and their financial advisors can take to manage potential conflicts.294 The Court
accepted the practical reality that banks may be conflicted, but put the onus on directors
to “be especially diligent in overseeing the conflicted advisor’s role in the sale
process”295 and explained that “because the conflicted advisor may, alone, possess
information relating to a conflict, the board should require disclosure of, on an ongoing
basis, material information that might impact the board’s process.”296
Del Monte and Rural Metro are examples of cases where, based on the records
before them, the courts found serious improper behavior by the investment banks. Such
cases have been rare and, moreover, the Delaware Court of Chancery has ruled, and the
Delaware Supreme Court has affirmed, that a fully informed stockholder vote may
effectively insulate a financial advisor from aiding and abetting liability, just as it may
insulate directors.297 In Singh v. Attenborough, the Delaware Supreme Court upheld the
dismissal of claims that investment bankers had aided and abetted the directors of Zale
Corporation in an alleged breach of fiduciary duty in connection with the sale of the
company. Amplifying its 2015 ruling in Corwin v. KKR Financial298 (addressing
“aiding-and-abetting” claims against corporate advisors), the Court held that, with the
exception of a claim for waste, when a merger is approved by an informed body of
disinterested stockholders and then closes, the business judgment rule applies, further
judicial examination of director conduct is generally inappropriate, and “dismissal is
typically the result.”299
Citing both Corwin and Singh v. Attenborough, the Delaware Court of Chancery,
as affirmed by the Delaware Supreme Court, has since dismissed aiding and abetting
claims against a financial advisor where there was no underlying breach of fiduciary
duties by the board of directors.300 So, too, has the Delaware Court of Chancery
dismissed an aiding and abetting claim against a financial advisor who had passive
awareness that its client’s disclosures had material omissions, where the client itself was
also aware of that information. The Court stated that “[a] general duty on third parties to
ensure that all material facts are disclosed, by fiduciaries to their principals, is … not a
duty imposed by law or equity.”301 A “passive failure” by a financial advisor to ensure
adequate disclosure to stockholders “without more,” does not give rise to aiding and
abetting liability.302 These decisions affirm that Delaware provides corporate advisors
with “a high degree of insulation from liability by employing a defendant-friendly
standard that requires plaintiffs to prove scienter and awards advisors an effective
immunity from due-care liability.”303
In addition to state law requirements, in 2016 the SEC issued guidance related to
disclosure of financial advisor fees in solicitations involving equity tender offers, a
transaction structure often used to effect M&A transactions. The guidance provides that
the board of a target company must disclose a summary of the material terms of the
compensation of the target’s financial advisor in its solicitation/recommendation
statement. A generic disclosure saying the financial advisor is being paid “customary
compensation” is not ordinarily enough—the disclosure must be sufficient to permit
shareholders to evaluate the advisor’s objectivity. The guidance provides that such
disclosure would generally include the types of fees payable, contingencies, milestones or
triggers relating to the fees, and any other information that would be material to a
shareholder’s assessment of the financial advisor’s analyses or conclusions, including any
material incentives or conflicts.309
As it did in the Netsmart decision, the Delaware Court of Chancery often requires
disclosure of management projections underlying the analyses supporting a fairness
opinion.310 Courts have also indicated that partial or selective disclosure of certain
projections can be problematic.
The SEC also imposes its own disclosure requirements in transactions subject to
the proxy rules. While the SEC is receptive to arguments that certain projections are out
of date or immaterial, it is normally the company’s burden to persuade the SEC that
projections that were provided to certain parties should not be disclosed. There can be
significant consequences for non-disclosure, including cease-and-desist actions in certain
situations where a company misleads investors about the future financial performance of
the company, such as through divergence between a company’s own private model
indicating underperformance and its subsequent public statements affirming the
company’s previous projections that proved to be inaccurate. Companies should take
care that their projections are careful, thorough and include an appropriate measure of
caution. And if forecasts are disclosed, and become unrealistic, companies should
consider possible updating and corrective disclosures. In light of the timing pressure
facing many transactions, where even a few weeks’ delay may add unwanted execution
risk, companies may preemptively disclose projections that they would have otherwise
kept private. Such preemptive efforts help accelerate the SEC review process and also
help to minimize the likelihood that a successful shareholder lawsuit will enjoin a
transaction pending further disclosure found to be required by a court. Nevertheless, a
company must avoid including so many figures in its disclosure so as to be confusing or
misleading to shareholders.
Delaware law and the views of the SEC staff on how much disclosure to require
(both of target projections and, in the case of transactions involving stock consideration,
buyer projections) continue to develop. For example, in October 2017, the SEC staff
released guidance providing that financial measures included in projections provided to
financial advisors for the purpose of rendering an opinion related to a business
combination transaction that are being disclosed in order to comply with law are not non-
GAAP financial measures and do not require GAAP reconciliation, potentially in
response to an increasing amount of frivolous litigation claims that such projections must
be reconciled under Regulation G.320 And in April 2018, the SEC staff released guidance
to confirm that the foregoing exemption applies if (1) the forecasts provided to financial
advisors are also provided to boards or board committees, or (2) a company determines
that disclosure of material forecasts provided to bidders is needed to comply with federal
securities laws, including anti-fraud provisions.321 As the rules and law regarding
disclosure of projections are fact-specific and evolving, companies should consult with
their legal and financial advisors well in advance of a filing to ensure that they are well
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informed as to how to strike the delicate balance between under- and over-disclosure in
this area.
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IV.
Structural Considerations
There are significant differences between deals involving public and private
company targets, as well as important considerations that are unique to deals with private
company targets. For example, transactions involving private company targets
potentially can be consummated more quickly than transactions involving public
company targets because a private target can typically be acquired without having to hold
a shareholder meeting subject to the federal proxy rules. In addition, many private
company transactions have a single owner or concentrated shareholder base, enabling the
acquiror to “lock up” the deal at signing by obtaining all requisite stockholder consents to
the transaction in connection with entry into the transaction agreement. Where a private
company is being acquired without any need for post-signing target shareholder approval,
there typically would not be any “fiduciary-out” or “change in recommendation”
provisions of the type discussed in Section V.A.3. Not only does this structure reduce the
time needed to close a deal by eliminating the post-signing shareholder approval process,
but it also increases deal certainty by eliminating interloper risk.
Although public mergers and acquisitions often have a handful of bespoke issues
arising from the particular circumstances, their terms and conditions tend to have less
variation than private deals, due to expectations of boards and shareholders of public
company targets. For example, asset purchase agreements, unlike public company
merger agreements, typically include provisions defining which assets and liabilities are
included in the sale and which are excluded, which allows the parties greater ability to
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customize the transaction (for instance, the parties can provide for all liabilities relating to
the target business to transfer, including historical liabilities, or can provide for target to
retain the historical liabilities—a so-called “our-watch, your-watch” construct). In
addition, private company acquisition agreements sometimes include purchase price
adjustments tied to the target business’ level of cash, debt and/or working capital at
closing or other specifically negotiated adjustments, whereas public company merger
agreements typically do not provide for any purchase price adjustments. Furthermore,
while it is very rare for public company target acquisition agreements to feature
contingent consideration that would be payable post-closing, private company acquisition
agreements include with greater frequency (although still in a minority of cases) earn-
outs providing for additional consideration to be paid after closing. Private company
acquisition agreements also may include post-closing covenants, such as non-competition
or employee non-solicitation provisions, whereas covenants in public company
agreements generally terminate at closing. Where the acquiror is purchasing less than
100% of the equity of a private company, the parties will need to consider the governance
and other terms of their ongoing relationship as shareholders of the target company,
which raises a myriad of additional issues to be negotiated. These issues may include
board representation, consent rights, preemptive rights, put/call rights, tag/drag-along
rights and/or information rights, among others, depending on the circumstances.
In recent years, there has been a steady upswing in the use of R&W insurance,
which provides coverage for breaches of representations and warranties in purchase
agreements. In 2018, it has been estimated the number of R&W insurance policies
placed exceeded 2,500, nearly triple the number of policies placed in 2015.322 Data on
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private M&A transactions is somewhat difficult to track, but one study estimates that in
2018 to 2019, 52% of private North America transactions used R&W insurance, up from
only 29% in 2016 to 2017.323 In addition, the number of R&W insurance brokers and
insurers has significantly increased in recent years, allowing clients to receive several
different proposals before selecting a primary carrier. While the rise of R&W insurance
cannot be attributed to a single factor, the use and attractiveness of such policies has
grown as: transaction parties and their advisors have become more comfortable using
R&W insurance to supplement or replace indemnification obligations in an acquisition
agreement; policy forms have become more standardized; pricing, breadth of coverage
and other policy terms have become more attractive as additional insurers have entered
the space, leading to a more competitive underwriting environment; the process of
obtaining a policy has become more streamlined, with a shorter timeline; insurance
coverage has become increasingly available in transactions exceeding $1 billion; and
carriers have been willing to proceed without the seller having any “skin in the game,” in
the form of an indemnity obligation; and insurers have started to recognize claims, giving
acquirors additional comfort that the insurance will respond in the event of a breach.
The use of R&W insurance has become an attractive structural solution for both
sellers and acquirors. From the perspective of a seller, R&W insurance can facilitate a
clean exit from a business without post-closing contingent liabilities or holdback of the
purchase price. While R&W insurance has become commonplace in strategic
transactions (indeed, Aon estimates that approximately 40-50% of its policies involved
“corporates” as sellers), R&W insurance can be especially attractive for private equity
sellers, where any type of post-closing contingent liability or holdback (i.e., in the form
of potential indemnification obligations). For instance, private equity sellers of portfolio
companies have been increasingly successful in requiring buyers to accept limited or no
post-closing indemnification so they may safely and quickly distribute deal proceeds to
their limited partners—a position that has been facilitated by the expanding availability
and use of R&W insurance. At the same time, from the perspective of an acquiror, R&W
insurance provides a reliable source for reimbursement for breaches other than a seller,
especially where the seller is not an optimal source of indemnification due to credit risks
or future plans with respect to the sale proceeds. Additionally, an acquiror usually can
obtain a longer survival period for representations and warranties and more robust
coverage from an insurance carrier than it might otherwise receive from a seller. Given
the increased availability and market familiarity with R&W insurance, sellers now often
insist that prospective acquirors obtain R&W insurance in lieu of post-closing seller
indemnification; likewise, prospective acquirors sometimes substitute R&W insurance
for post-closing indemnification to enhance the attractiveness of their bids. In addition to
negotiating whether R&W insurance will be used in lieu of post-closing indemnification,
parties also negotiate who will bear the cost of the R&W insurance premium and the
policy deductible (known in the R&W insurance space as the retention).
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participate in certain sectors perceived by such carriers as higher risk, which may limit
the overall level of coverage available and competition over pricing and terms. In
addition, although increasingly more streamlined, the process for purchasing R&W
insurance, including a review of the acquiror’s due diligence by the insurance carrier and
negotiating policy wording with the insurance carrier, takes time and effort. While
brokers and insurers alike can move with alacrity and put a policy in place in a
compressed period of time, doing so generally requires the acquiror to have not only
completed an in-depth diligence review of the target across multiple functions, but to be
prepared to respond to a series of questions and follow-up questions across multiple
business areas.
Looking ahead, while R&W insurance has thus far been used nearly exclusively
in private deals, it might become more readily available in public transactions. However,
because the insurers would generally have no subrogation rights (even with respect to
fraud) in a public company transaction, the underwriters would be even more insistent on
the scope and breadth of both the acquiror’s diligence and the disclosure schedules, and
might seek certain additional exclusions from coverage. Similarly, the nature and scope
of public company disclosures and SEC filings might result in certain limited variations
to R&W insurance policies in the public company R&W insurance context.
Where the target of an acquisition is a public company, the legal form of the
transaction is similarly a critical initial structuring consideration. The legal structure may
have important consequences for the deal, including the tax treatment of the transaction,
the speed at which the transaction will be completed and the potential transactional
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litigation risks. Parties to a transaction should be mindful of the consequences of the
transaction structure they select.
Public acquisitions typically take the form of (i) a one-step merger or (ii) a two-
step tender offer, which is a tender offer for shares of the target company followed by a
second-step “squeeze-out” merger where all remaining shares are acquired. The decision
to choose one structure over another is generally informed by timing, regulatory
considerations, financing requirements and other tactical considerations.
A one-step merger is a creature of state statutes that provides for the assumption
of all of the non-surviving entities’ assets and liabilities by the surviving entity. A
merger is effectively the acquisition of all assets and an assumption of all liabilities of
one entity by another, except that, in a merger, the separate legal existence of one of the
two merger parties ceases upon consummation of the merger by operation of law. A
statutory long-form merger with a public target typically requires the target’s
shareholders to vote on the merger proposal at a shareholder meeting after the preparation
(and potential SEC review) of a proxy statement. Most commonly, statutory mergers are
structured so that the constituent entities to the merger are the target and a subsidiary of
the acquiror (a so-called “triangular” merger), in lieu of the acquiror directly
participating. A forward triangular merger involves the target merging with and into a
subsidiary of the acquiror, with the subsidiary as the surviving entity. A reverse
triangular merger involves a subsidiary of the acquiror merging with and into the target,
with the target as the surviving entity. Choosing a merger structure is a deal-specific
decision that is primarily driven by income tax considerations and sometimes by concerns
relating to whether anti-assignment and change-of-control provisions in critical contracts
may be triggered if one form is chosen over the other.324 The requirements for tax-free
treatment of forward triangular mergers and reverse triangular mergers, as well as certain
other transaction structures, are discussed in Section IV.C.6.
A two-step transaction involves a public tender offer in which the acquiror makes
a direct offer to the target’s public shareholders to acquire their shares, commonly
conditioned on the acquiror acquiring at least a majority of the target’s common stock
upon the close of the tender offer. In cases where, upon consummation of the offer, the
acquiror holds at least the statutorily prescribed percentage (typically 90% for a short-
form merger, or a majority in the case of a transaction effected pursuant to Section 251(h)
of the DGCL, as discussed below) of each class of target stock entitled to vote on the
merger, the acquiror can complete the acquisition through a merger without a shareholder
vote promptly following consummation of the tender offer,325 thereby avoiding the need
to incur the expense and delay of soliciting proxies and holding a shareholders’ meeting
to approve the second-step merger.
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1. Considerations in Selecting a Merger vs. a Tender Offer Structure
a. Speed
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announced in 2019, a decline from approximately 28% in 2016. The increased likelihood
that the SEC will not review an all-cash merger proxy statement may change the calculus
of whether to structure an all-cash deal as a one-step merger or a two-step tender offer, by
decreasing the delay between signing and closing of all-cash mergers.
b. Dissident Shareholders
Another potential advantage of the tender offer structure is its relative favorability
in most circumstances in dealing with dissident shareholder attempts to “hold up”
friendly merger transactions. The tender offer structure may be advantageous in
overcoming hold-up obstacles because:
(1) tender offers do not suffer from the so-called “dead-vote” problem that arises in
contested merger transactions when the holders of a substantial number of shares sell
after the record date and then either do not vote or change an outdated vote;
(2) ISS and other proxy advisory services only occasionally make recommendations
or other commentary with respect to tender offers because there is no specific voting
or proxy decision, making it more likely for shareholders to tender based on their
economic interests rather than to vote based on ISS’s views (which may reflect non-
price factors); and
(3) recent experience indicates that dissident shareholders may be less likely to try to
“game” a tender offer than a merger vote, and therefore the risk of a “no” vote (i.e., a
less-than-50% tender) may be lower than for a traditional voted-upon merger.
c. Standard of Review
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2. Delaware Facilitates Use of Tender Offers: Section 251(h)
Before Delaware adopted Section 251(h) to facilitate the use of tender offers, a
second-step merger following a tender offer for a Delaware corporation always required a
shareholder vote—even if the outcome was a formality because the acquiror owned
enough shares to single-handedly approve the transaction—unless the acquiror reached
Delaware’s short-form merger 90% threshold. Despite the inevitability of the vote’s
outcome, the extended process of preparing a proxy statement and holding a meeting
would impose transaction risk, expense and complexity on the parties. The prospect of
delay had been a significant deterrent to the use of tender offers, especially by private
equity acquirors, which typically need to acquire full ownership of the target in a single
step to facilitate their acquisition financing.
In 2013, Delaware amended its corporation law to add Section 251(h), which
permits the inclusion of a provision in a merger agreement eliminating the need for a
shareholder vote to approve a second-step merger following a tender offer under certain
conditions—including that following the tender offer the acquiror owns sufficient stock
to approve the merger pursuant to the DGCL and the target’s charter (i.e., a majority of
the outstanding shares, unless the target’s charter requires a higher threshold or the vote
of a separate series or class).331 The provision requires that (i) the offer extend to any and
all outstanding voting stock of the target (except for stock owned by the target itself, the
acquiror, any parent of the acquiror (if wholly owned) and any subsidiaries of the
foregoing); (ii) all non-tendering shares receive the same amount and type of
consideration as those that tender; and (iii) the second-step merger be effected as soon as
practicable following the consummation of the offer.
Section 251(h) adds speed and certainty to some acquisitions by allowing them to
close upon completion of the tender offer without having to wait for a shareholder vote,
the result of which—because the acquiror already holds sufficient shares to approve the
merger—is a foregone conclusion.
Amendments to the DGCL in 2014 and 2016 expanded the scope of transactions
that could be effected under Section 251(h). Notably, the 2014 amendments clarified
that, for purposes of determining whether sufficient shares were acquired in the first-step
tender offer, shares tendered pursuant to notice of guaranteed delivery procedures cannot
be counted by the acquiror toward the threshold until the shares underlying the guarantee
are actually delivered. Amendments exempting “rollover stock” from the requirement
that all non-tendering shares receive the same amount and kind of consideration as those
that tender may increase the appeal of two-step structures to private equity acquirors—
which sometimes seek to have target management roll over some or all of their existing
equity in connection with an acquisition to further align the management team’s
incentives with those of the acquiror post-acquisition. The 2016 amendments also permit
rollover stock to be counted toward satisfaction of the requirement that the acquiror own
sufficient shares following completion of the tender offer to approve the second-step
merger in situations where rollover stock is exchanged following completion of the
tender offer.
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Another development favoring the use of Section 251(h) to effect an acquisition is
a 2016 decision of the Delaware Court of Chancery, In re Volcano Corp.,332 which held
that the first-step tender of shares to the acquiror in a Section 251(h) transaction
“essentially replicates [the] statutorily required stockholder vote in favor of a merger in
that both require approval—albeit pursuant to different corporate mechanisms—by
stockholders representing at least a majority of a corporation’s outstanding shares to
effectuate the merger.”333 Accordingly, the standard of review for a Section 251(h)
transaction will be the business judgment rule, where a majority of a company’s fully
informed, disinterested and uncoerced stockholders tender their shares, providing Corwin
protections in the tender offer context. The decision makes clear that using the two-step
structure under Section 251(h) does not, by itself, cause a target board to lose the benefit
of a business judgment standard of review that could be obtained through receipt of a
stockholder vote in a long-form merger. Volcano therefore suggests that tender offers
under Section 251(h) will not deprive the target board of the litigation benefits of fully
informed stockholder approval.
Before the adoption of Section 251(h), several workarounds were sometimes used
to deal with the possibility that a tender offer would result in the acquisition of sufficient
shares to (eventually) approve a second-step merger, but not reach the 90% threshold
needed for a short-form merger: the top-up option, dual-track structure and subsequent
offering period. Although Section 251(h) has significantly diminished the prominence of
these workarounds by eliminating in applicable transactions the need to reach the 90%
threshold, they remain relevant because Section 251(h) may not always be available or
optimal for the parties. For instance, it would not be available for targets that are not
incorporated in Delaware (or another state that has adopted a provision similar to
Section 251(h)). Section 251(h) is likewise unavailable if the target’s charter expressly
requires a shareholder vote on a merger or if the target’s shares are not publicly listed or
held by more than 2,000 holders.
a. Top-Up Options
To address the burden of the 90% threshold, the market evolved a workaround in
the form of the top-up option. Such an option, exercisable after the close of the tender
offer, permits the acquiror to purchase a number of newly issued shares directly from the
target so that the acquiror may reach the short-form merger statute threshold, thereby
avoiding a shareholder vote and enabling an almost immediate consummation of the
transaction. Critically, a top-up option is limited by the amount of authorized but
unissued stock of the target, which may prevent the target from issuing sufficient stock
for the acquiror to reach the short-form merger threshold.
b. Dual-Track Structures
A number of years ago, some private equity firms began using a dual-track
approach that involves launching a two-step tender offer (including a top-up option)
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concurrently with filing a proxy statement for a one-step merger. The logic behind this
approach is that, if the tender offer fails to reach the minimum number of shares upon
which it is conditioned—which in combination with the shares issued pursuant to a top-
up option would allow for a short-form merger—the parties would already be well along
the path to a shareholders’ meeting for a fallback long-form merger (it should be noted
that while the SEC will begin review, it will not declare the proxy statement effective
until after the expiration of the tender offer). Examples of this approach include 3G
Capital/Burger King, Bain Capital/Gymboree and TPG/Immucor.
SEC rules permit a bidder in a tender offer to provide for a subsequent offering
period if, among other requirements, the initial offering period of at least 20 business has
expired, the bidder immediately accepts and promptly pays for all securities tendered
during the initial offering period, and the bidder immediately accepts and promptly pays
for all securities as they are tendered during the subsequent offering period. This gives a
bidder a second opportunity to reach 90% if it does not reach that threshold by the end of
the initial offering period; once shareholders see that the bidder has acquired sufficient
shares in the initial offer to ultimately approve a second-step merger, they may choose to
tender into the subsequent offering period rather than wait until that merger is completed.
Of course, there is no assurance that providing a subsequent offering period necessarily
will result in reaching the 90% threshold.
4. Mergers of Equals
MOEs often provide little or no premium above market price for either company.
Instead, an exchange ratio is set to reflect one or more relative metrics, such as assets,
earnings and capital contributions, or market capitalizations of the two merging parties—
typically, but not always, resulting in a market-to-market exchange. Assuming a proper
exchange ratio is set, MOEs can provide a fair and efficient means for the shareholders of
both companies to benefit because the combined company can enhance shareholder value
through merger synergies at a lower cost than high-premium acquisitions.
Due to the absence or modesty of a premium to market price, however, MOEs are
particularly vulnerable to dissident shareholder campaigns and competing bids. While no
protection is ironclad, steps can be taken to protect an MOE transaction. As a
preliminary matter, it is important to recognize that the period of greatest vulnerability is
the period before the transaction is signed and announced. Parties must be cognizant that
leaks or premature disclosure of MOE negotiations can provide an opening for a would-
be acquiror to submit a competing proposal or pressure a party into a sale or an auction;
such leaks can also encourage shareholders to pressure one or both companies into
abandoning the transaction before it is ever signed or the parties have had an opportunity
to fully and publicly communicate its rationale to the market. A run-up in the stock price
of one of the companies—whether or not based on merger rumors—also can derail an
MOE, because no company wants to announce a transaction with an exchange ratio that
reflects a substantial discount to market. MOE agreements generally include robust
structural protections, such as break-up fees, support commitments, no-shops and “force
the vote” provisions which prevent the parties from terminating the merger agreement in
the face of a competing offer without giving the shareholders an opportunity to vote on
the merger. Once the deal has been made public, it is critical to advance a strong
business rationale for the MOE in order to obtain a positive stock market reaction and
thus reduce both parties’ vulnerability to shareholder unrest and/or a competing offer.
The appearance and reality of a true combination of equals, with shareholders sharing the
benefits of the merger proportionately, are essential to winning shareholder support in the
absence of a substantial premium.
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the combined company’s headquarters and key operations, the rationalization of the
companies’ separate corporate cultures and the selection of officers and directors. In
most of the larger MOEs, there has been substantial balance, if not exact parity, in board
representation and senior executive positions. This approach allows for a selection of the
best people from both organizations to manage the combined company, thereby
enhancing long-term shareholder value. For example, the CEO of one company may
become the chairman of the combined company, with the other CEO continuing in that
role at the combined company, thus providing for representation at the helm from both
constituent companies.
Rule 13e-3 is intended to provide greater transparency and protection to the non-
affiliated shareholders in potential conflict transactions, which it accomplishes by
requiring enhanced public disclosures relative to those that apply in a typical business
combination not involving purchases by affiliates of the issuer. These disclosures
include, among other things, an affirmative statement by the acquiror, each affiliate and
the issuer as to whether the acquiror, affiliate or issuer, respectively, believes the going
private transaction is fair to minority stockholders (with a detailed description of the
factors underlying that conclusion), as well as extensive disclosure regarding any report,
opinion or appraisal received by the acquiror or issuer from an outside party (other than
the opinion of counsel) that is materially related to the transaction. Given these
requirements, it is crucial that practitioners identify early in the transaction process
whether the deal will or may be subject to Rule 13e-3, and, if so, be mindful that banker
“board books” and other documents produced for any transaction party, even at a
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preliminary stage of transaction planning, may eventually become public based on the
comprehensive disclosure requirements of Rule 13e-3.
The pricing structure used in a particular transaction (and the allocation of risk
between the acquiror and the target and their respective shareholders) will depend on the
characteristics of the deal and the relative bargaining strength of the parties. All-stock
and part-stock mergers raise difficult pricing and market risk issues, particularly in a
volatile market. In such transactions, even if the parties come to an agreement on the
relative value of the two companies, the value of the consideration may be dramatically
altered by market changes, such as a substantial decline in financial markets, industry-
specific market trends, company-specific market performance or any combination of
these. Although nominal market value is not the required legal criterion for assigning
value to stock consideration in a proposed merger, a target in a transaction may have
great difficulty in obtaining shareholder approval of a transaction where nominal market
value is less than, or only marginally greater than, the unaffected market value of the
target’s stock. In addition, a stock merger proposal that becomes public carries
substantial market risk for the acquiror, whose stock price may fall due to the anticipated
financial impact of the transaction. Such a market response may put pressure on the
acquiror to offer additional make-whole consideration to a target, worsening the impact
of the transaction from an accretion/dilution perspective, or to abandon the transaction
altogether.
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1. All-Cash Transactions
The popularity of stock as a form of consideration ebbs and flows with economic
conditions. All-cash bids have the benefit of being of certain value and will gain quick
attention from a target’s shareholders, particularly in the case of an unsolicited offer. In
addition, the acquiror’s stock price is often less adversely affected by an all-cash offer as
compared to an all-stock offer because no shares of the acquiror are being issued. Of
course, some bidders may not have sufficient cash and financing sources to pursue an all-
cash transaction. In such cases, the relative benefits and complexities of part-cash/part-
stock and all-stock transactions should be considered.
2. All-Stock Transactions
The typical stock merger is subject to market risk on account of the interval
between signing and closing and the volatility of security trading prices. A drop in the
price of an acquiror’s stock between the execution of the acquisition agreement and the
closing of the transaction can alter the relative value of the transaction to both acquiror
and target shareholders: target shareholders might receive less value for their exchanged
shares or, if additional shares are issued to compensate for the drop, the transaction will
be less accretive or more dilutive to the acquiror’s earnings per share. This market risk
can be addressed by a pricing structure that is tailored to the risk allocation agreed to by
the parties. These pricing structures may include using a valuation formula instead of a
fixed exchange ratio, a collar, or, more rarely, the so-called “walk-away” provisions
permitting unilateral termination in the event the acquiror’s share price falls below a
certain level. Companies considering cross-border transactions may also need to consider
the impact of different currencies on the pricing structure. Currency risk raises similar
issues to market risk and can amplify the market volatility factor inherent in all-stock
transactions. Risks relating to deal consideration in cross-border deals are explored
further in Section VII.C.
The simplest, and most common, pricing structure (especially in the context of
larger transactions) in a stock-for-stock transaction is to set a fixed exchange ratio at the
time a merger agreement is signed. On the one hand, the advantage of a fixed exchange
ratio for an acquiror is that it permits the acquiror to determine at the outset how much
stock it will have to issue in the transaction (and thus to determine with some certainty
the impact on per-share earnings and whether a shareholder vote may be required on such
issuance pursuant to the rules of the applicable stock exchange). On the other hand, a
fixed exchange ratio with a post-signing decline in the market value of the acquiror’s
stock could jeopardize shareholder approval and/or invite third-party competition (by
decreasing the value that the target’s shareholders will receive at closing). From an
acquiror’s perspective, these are often risks that can be dealt with if and when they arise,
and the acquiror typically prefers the certainty of a fixed number of shares. To the extent
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an acquiror and a target are in the same industry, industry-specific events could very well
affect their stock prices similarly and therefore not affect the premium to be afforded by
the exchange ratio.
Even where the market moves adversely to the acquiror’s stock, companies that
are parties to pending strategic mergers have been able to successfully defend their deals
based on the long-term strategic prospects of the combined company. Nevertheless, in
cases where there is concern that shareholders may vote down a transaction because of
price fluctuation, the parties may turn to other pricing mechanisms to allocate market
risk.
In many situations, one or both parties (typically the target) will be unwilling to
permit market fluctuation to impair its ability to achieve the benefits of the bargain that
was struck at signing. One solution is to provide for a floating exchange ratio, which will
deliver a fixed dollar value of the acquiror’s stock (rather than a fixed number of shares).
The exchange ratio is set based on an average market price for the acquiror’s stock during
some period, normally 10 to 30 trading days, prior to closing. Thus, the acquiror would
agree to deliver a fixed value (e.g., $30) in stock for each of the target’s shares, with the
number of acquiror’s shares to be delivered based on the market price during the
specified period. An acquiror bears the market risk of a decline in the price of its stock
since, in that event, it will have to issue more shares to deliver the agreed value.
Correspondingly, an acquiror may benefit from an increase in the price of its stock since
it could deliver fewer shares to provide the agreed value. Because a dramatic drop in the
acquiror’s stock may require the acquiror to buy its target for far more shares than had
been intended at the time the transaction was announced (and may even trigger a
requirement for a vote of the acquiror shareholders to authorize such issuance),
companies should carefully consider the possibility of dramatic market events occurring
between signing and closing. A target’s shareholders bear little market risk in this
scenario and correspondingly will not benefit from an increase in stock prices since the
per-share value is fixed.
In order to mitigate the risk posed by market fluctuations, parties may desire a
longer measuring period for valuing the acquiror’s stock. Longer measuring periods
minimize the effects of market volatility on how many acquiror shares will be issued as
merger consideration. Additionally, acquirors favor longer measuring periods because,
as the transaction becomes more likely and approaches fruition, the acquiror’s stock may
drop to reflect any anticipated earnings dilution. By contrast, a target may argue that the
market price over a shorter period immediately prior to consummation provides a better
measure of consideration received.
Parties must also consider the anticipated effect on the acquiror’s stock price of
short selling by arbitrageurs once the transaction is announced. In some mergers, pricing
formulas and collars are considered inadvisable due to the potential downward pressure
on an acquiror’s stock as a result of arbitrage trading.
The fixed exchange ratio within a price collar is another formulation that may
appeal to a target that is willing to accept some risk of a pre-closing market price decline
in an acquiror’s stock, but wishes to protect against declines beyond a certain point. In
this scenario, the target’s shareholders are entitled to receive a fixed number of shares of
acquiror stock in exchange for each of their shares, and there is no adjustment in that
number so long as the acquiror’s stock is valued within a specified range during the
valuation period (e.g., 10% above or below the price on the date the parties agree to the
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exchange ratio). If, however, the acquiror’s stock is valued outside that range during the
valuation period, the number of shares to be delivered is adjusted accordingly (often to
one of the endpoints of the range). Thus, for example, if the parties agree on a one-for-
one exchange ratio and value the acquiror’s stock at $30 for purposes of the transaction,
they might agree that price movements in the acquiror’s stock between $27 and $33
would not result in any adjustments. If, however, the stock is valued at $25 during the
valuation period, the number of shares to be delivered in exchange for each target share
would be 1.08, i.e., a number of shares equal to $27 (the low end of the collar) based on
the $25 valuation. Therefore, although the target’s shareholders will not receive an
increased number of shares because of the drop in the acquiror’s stock price from $30 to
$27, they will be compensated in additional acquiror shares by the drop in price from $27
to $25.
b. Walk-Aways
While walk-away provisions are quite rare, they are sometimes found in all-stock
bank deals. Generally, these provisions provide for a double trigger, requiring not only
an agreed-upon absolute percentage decline in the acquiror’s stock price, but also a
specified percentage decline in the acquiror’s stock price relative to a defined peer group
of selected companies or a designated index of bank stocks during the pricing period. For
example, the double-trigger walk-away may require that the acquiror’s average stock
price prior to closing fall (1) 15% or 20% from its price at the time of announcement and
(2) 15% or 20% relative to a defined index of bank stocks. The double trigger essentially
limits the walk-away right to market price declines specifically related to the acquiror,
leaving the target’s shareholders to bear the risk of price declines related to industry
events. That is, the acquiror may argue that if its stock does no more than follow a
general market trend, there should be no right on the part of the target to “walk.” Walk-
away rights are generally tested during a short trading period prior to closing and often
include an option for an acquiror to elect to increase the exchange ratio to avoid
triggering the target’s walk-away right.
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c. Finding the Appropriate Pricing Structure for All-Stock
Transactions
The pricing structure used in a particular all-stock transaction (and thus the
allocation of market risk between an acquiror and a target and their respective
shareholders) will depend on the characteristics of the transaction and the relative
bargaining strength of the parties. A pricing structure used for one transaction may, for a
variety of reasons, be entirely inappropriate for another. For instance, in a situation that
is a pure sale, a target might legitimately request the inclusion of protective provisions
such as a floating exchange ratio and/or a walk-away, especially if the target has other
significant strategic opportunities. An acquiror may argue, of course, that the target
should not be entitled to absolute protection (in the form of a walk-away) from general
industry (compared to acquiror-specific) risks. A double-trigger walk-away can correct
for general industry-wide events. At the other end of the spectrum, in an MOE or
“partnership” type of transaction, claims on the part of either party for price protection,
especially walk-aways, are less convincing. The argument against price protection is
that, once the deal is signed, both parties’ shareholders are (and should be) participants in
both the opportunities and the risks of the combined company.
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fixed exchange ratios, floating exchange ratios, collars and walk-aways). In addition, if
there is a formula for the cash component, it must be matched to the formula for the stock
component. An important threshold issue is whether the parties intend for the values of
the stock and cash components to remain equal as the price of the acquiror’s shares
fluctuates or whether there should be scenarios in which the values of the cash and stock
components can diverge. This will be a vital consideration in determining the proper
allocation procedures for the cash and stock components in circumstances where target
shareholders are afforded the opportunity to make a consideration election.
While there can be a variety of business reasons for adjusting the aggregate limits
on the percentage of target shares to be exchanged for cash versus stock consideration,
historically, the most common reason has been the desire to preserve the tax-free status of
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the transaction. As described below in Section IV.C.7, a part-cash, part-stock merger
(including a two-step transaction with a first-step tender or exchange offer followed by a
back-end merger) generally can qualify as a tax-free reorganization only if at least a
minimum portion of the total value of the consideration consists of acquiror stock.
Historically, satisfaction of this requirement was, in all cases, determined by reference to
the fair market value of the acquiror stock issued in the merger (i.e., on the closing date).
Accordingly, a part-cash, part-stock merger, particularly with a fixed or collared
exchange ratio, that met this requirement when the merger agreement was signed could
fail to qualify as a tax-free reorganization if the value of the acquiror’s shares declined
before the closing date. As described in Section IV.C.7, Treasury regulations issued in
2011 permit the parties, in circumstances where the consideration is “fixed” within the
meaning of the regulations, to determine whether this requirement is met by reference to
the fair market value of the acquiror stock at signing rather than at closing. The
regulations clarify that parties can rely on the signing date rule even if the acquisition
agreement contemplates a stock/cash election, as long as the aggregate mix of stock/cash
consideration is fixed.
In structuring a part-cash, part-stock pricing formula and allocating the cash and
stock consideration pools, it is also important to consider how dissenting shares,
employee stock options and other convertible securities will be treated. In addition, a
board considering a proposal involving both cash and stock consideration should seek the
advice of counsel with regard to whether the transaction may invoke enhanced scrutiny
under Revlon.
Another approach is the use of a cash election merger. Cash election procedures
provide the target’s shareholders with the option of choosing between cash and stock
consideration. These procedures allow short-term investors to cash out of their positions,
while longer-term investors can exchange their shares in a tax-free exchange. Cash
election procedures work best where a mechanism equalizes the per share value of the
cash and the stock consideration. Contractual provisions and related public disclosures
concerning the election procedures must be drafted carefully to deal with the possibility
that there may be significant oversubscriptions for one of the two types of consideration.
Another, albeit rarer, approach for handling oversubscriptions has been to select
shareholders on a random or other equitable basis from those who have elected to receive
the oversubscribed consideration until a sufficient number of shares are removed from the
oversubscribed pool. The methods by which shareholders are selected for removal from
the oversubscribed pool vary from a straight lottery to selection based on block size or
time of election. Since proration to account for an oversubscription of cash generally
does not result in shareholders incurring additional tax beyond that which is caused by
their election, there is some precedent for using proration for cash oversubscriptions but a
lottery selection process for stock oversubscriptions.
Even once the form of consideration is settled, targets are still confronted with the
challenge of properly valuing the consideration offered in a proposed transaction. This
valuation is a significant element in a board’s decision whether to approve a particular
transaction. Even with diligence, the evaluation of a stock merger, regardless of whether
it involves a sale-of-control, can be quite complex. Directors may properly weigh a
number of issues beyond the headline per share payment when evaluating a proposed
transaction.
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a. Short- and Long-Term Values
Although current market value provides a ready first estimate of the value of a
transaction to a company’s shareholders, the Delaware Supreme Court in QVC and in
other cases has stated that such valuation alone is not sufficient, and certainly not
determinative, of value.335 In the sale-of-control context, directors of a company have
one primary objective: “to seek the transaction offering the best value reasonably
available to the stockholders.”336 This objective would ordinarily not be satisfied by
looking only to the latest closing prices on the relevant stock exchange.
Under either the Revlon standard or the traditional business judgment rule, the
valuation task necessarily calls for the exercise of business judgment by directors. A
board must not only look at financial valuations, but also must make judgments
concerning the potential for success of the combined company. Due diligence by both
parties to a stock-based merger is indispensable to informed decision-making, and boards
will typically carefully review pro forma financial information. Directors of a company
may need to consider such factors as past performance of the security being offered as
consideration, management, cost savings and synergies, past record of successful
integration in other mergers, franchise value, antitrust issues, earnings dilution and
certainty of consummation. While predicting future stock prices is inherently
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speculative, a board can and should evaluate such information in the context of the
historic business performance of the other party, the business rationale underlying the
merger proposal and the future prospects for the combined company. To the extent
competing bids are under review, directors should be careful to apply comparable
evaluation criteria in an unbiased manner to avoid any suggestion that they have a
conflict of interest pushing them to favor one bid over another or that they are not acting
in good faith.
Absent a limited set of circumstances as defined under Revlon, directors are not
required to restrict themselves to an immediate or short-term time frame. Instead,
directors are entitled to select the transaction they believe provides shareholders with the
best long-term prospects for growth and value enhancement with the least amount of
downside risk; directors thus have substantial discretion to exercise their judgment. In its
Time-Warner decision, the Delaware Supreme Court stated that the directors’ statutory
mandate “includes a conferred authority to set a corporate course of action, including
time frame, designed to enhance corporate profitability.”339 In the same vein of judicial
deference to director decision-making, Time-Warner likewise explained that, even when
a transaction is subject to enhanced scrutiny, a court should not be involved in
“substituting its judgment as to what is a ‘better’ deal for that of a corporation’s board of
directors.”340
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Consideration of employee and other constituent interests is also important in
assuring a smooth transition period between the signing of a merger agreement and the
closing of the transaction. It is important for the selling company to strive to preserve
franchise value throughout the interim period, which may be more difficult in mergers
that require a lengthy time period for consummation. Moreover, the impact of a proposed
merger on a selling company’s franchise and local community interests can have a direct
impact on the acquiror’s ability to obtain the requisite regulatory approvals.
Where an acquiror has a low-vote or no-vote class of capital stock, it may seek to
use such stock as currency in an acquisition. Typically, a class of no-vote or low-vote
shares trades at a discount to its counterpart with full voting rights. Accordingly, a target
board may take into account any such discount in evaluating the value of such low-vote
or no-vote stock consideration. In addition, certain transaction structures require the use
of solely (or at least a sufficient quantum of) acquiror voting stock in order to qualify as a
“reorganization” for federal income tax purposes.
a. Price-Protection CVRs
Where target shareholders are particularly concerned about assessing the value of
acquiror securities received as merger consideration, the parties can employ a contingent
value right (“CVR”) to provide some assurance of that value over some post-closing
period of time. This kind of CVR, often called a “price-protection” CVR, typically
provides a payout equal to the amount (if any) by which the specified target price exceeds
the actual price of the reference security at maturity of the CVR. Unlike floating
exchange ratios, which only provide value protection to target shareholders for the period
between signing and closing, price-protection CVRs effectively set a floor on the value of
the reference securities issued to target shareholders at closing over a fixed period of
time, usually ranging from one to three years.
For example, a price-protection CVR for a security that has a $40 market value at
the time of the closing of a transaction might provide that if, on the first anniversary of
the closing, the average market price over the preceding one-month period is less than
$38, the CVR holder will be entitled to cash or acquiror securities with a fair market
value to compensate for the difference between the then-average trading price and $38.
Price-protection CVRs may also include a floor price, which caps the potential payout
under the CVR if the market value of the reference shares drops below the floor,
functioning in the same manner as a collar or a cap in the case of a floating exchange
ratio. For example, the previously described CVR might include a $33 floor price, such
that CVR holders would never be entitled to more than $5 in price protection (the
difference between the $38 target price and the $33 floor price), thereby limiting the
financial or dilutive impact upon the acquiror at maturity of the CVR. Despite some
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recent uses of price protection CVRs, they generally are less commonly used than event-
driven CVRs (described below).
b. Event-Driven CVRs
In recent years, CVRs have predominantly been used to bridge valuation gaps
relating to contingencies affecting the target company’s value, such as, for example, the
outcome of a significant litigation, or the regulatory approval of a new drug of the target.
A CVR of this type, often called an “event-driven” CVR, may also increase deal certainty
by allowing the parties to close the deal without the contingency having been resolved.
Event-driven CVRs typically provide holders with payments when certain events
resolving the contingency occur, or when specific goals, usually related to the
performance of the acquired business, are met. For instance, Bristol-Myers Squibb’s $93
billion acquisition of Celgene provides for an additional cash payment upon FDA
approval of three late-stage drug assets. Furthermore, Shire plc’s 2015 acquisition of
Dyax Corp. for approximately $6 billion provided for additional payments (up to an
aggregate value of nearly $650 million) tied to payment triggers related to the receipt of
FDA approval for two particular drugs.
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6. Federal Income Tax Considerations
a. Direct Merger
In this structure, the target merges with and into the acquiror (or into a limited
liability company that is a direct wholly owned subsidiary of the acquiror). This will
generally be nontaxable to the target, the acquiror and the target’s shareholders who
receive only stock of the surviving corporation (excluding “nonqualified preferred stock”
as described below), provided that such acquiror stock constitutes at least 40% of the
total consideration. For these purposes, stock includes voting and nonvoting stock, both
common and preferred. Target shareholders will be taxed on the receipt of any cash or
“other property” in an amount equal to the lesser of (1) the amount of cash or other
property received and (2) the amount of gain realized in the exchange, i.e., the excess of
the total value of the consideration received over the shareholder’s adjusted tax basis in
the target stock surrendered. For this purpose, “other property” includes nonqualified
preferred stock. Nonqualified preferred stock includes any class of preferred stock that
does not participate in corporate growth to any significant extent and: (1) is puttable by
the holder within 20 years, (2) is subject to mandatory redemption within 20 years, (3) is
callable by the issuer within 20 years and, at issuance, is more likely than not to be called
or (4) pays a variable rate dividend. However, if acquiror nonqualified preferred stock is
received in exchange for target nonqualified preferred stock, such nonqualified preferred
stock is not treated as “other property.” Any gain recognized generally will be capital
gain, although it can, under certain circumstances, be taxed as dividend income.
Historically, the requirement that acquiror stock constitute at least 40% of the
total consideration was, in all cases, determined by reference to the fair market value of
the acquiror stock issued in the merger (i.e., on the closing date). Treasury regulations
issued in 2011 permit the parties, in circumstances where the consideration is “fixed”
(within the meaning of the regulations), to determine whether this requirement is met by
reference to the fair market value of the acquiror stock at signing rather than at closing,
adding flexibility and certainty on an issue essential to achieving tax-free treatment. The
regulations also clarify that this “signing date rule” is available in certain variable
consideration transactions with collars.
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b. Forward Triangular Merger
In this structure, the target merges with and into an at least 80% owned (usually
wholly owned) direct subsidiary of the acquiror, with the merger subsidiary as the
surviving corporation. The requirements for tax-free treatment and the taxation of non-
stock consideration (including nonqualified preferred stock) are the same as with a direct
merger. However, in order for this transaction to be tax free, there are two additional
requirements. First, no stock of the merger subsidiary can be issued in the transaction.
Thus, target preferred stock may not be assumed in the merger but must be reissued at the
acquiror level or redeemed prior to the merger. Second, the merger subsidiary must
acquire “substantially all” of the assets of the target, which generally means at least 90%
of net assets and 70% of gross assets. This requirement must be taken into account when
considering distributions, redemptions or spin-offs before or after a merger.
In this structure, a merger subsidiary formed by the acquiror merges with and into
the target, with the target as the surviving corporation. In order for this transaction to be
tax free, the acquiror must acquire, in the transaction, at least 80% of all of the target’s
voting stock and 80% of every other class of target stock in exchange for acquiror voting
stock. Thus, target non-voting preferred stock must either be given a vote at the target
level and left outstanding at that level, exchanged for acquiror voting stock or redeemed
prior to the merger. In addition, the target must retain “substantially all” of its assets after
the merger.
An alternative structure is for both the acquiror and the target to be acquired by a
new holding company in a transaction intended to qualify as a tax-free exchange under
Section 351 of the Internal Revenue Code. As a corporate matter, this would be achieved
by the holding company creating two subsidiaries, one of which would merge with and
into the acquiror and the other of which would merge with and into the target in two
simultaneous reverse triangular mergers. In addition to each merger potentially
qualifying as a tax-free reverse triangular merger, shareholders of the acquiror and the
target would receive tax-free treatment under Section 351 to the extent that they received
holding company stock, which may be common or preferred (other than nonqualified
preferred stock), voting or non-voting, provided that the shareholders of the acquiror and
the target, in the aggregate, own at least 80% of the voting stock and 80% of each other
class of stock (if any) of the holding company immediately after the transaction. Unlike
the other transaction forms discussed above, there is no limit on the amount of cash that
may be used in this transaction as long as the 80% aggregate ownership test is satisfied.
Cash and nonqualified preferred stock received will be taxable up to the amount of gain
realized in the transaction.
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e. Multi-Step Transaction
A multi-step transaction may also qualify as wholly or partially tax free. Often,
an acquiror will launch an exchange offer or tender offer for target stock to be followed
by a merger that forces out target shareholders who do not tender into the offer. Because
the purchases under the tender offer or exchange offer and the merger are part of an
overall plan to make an integrated acquisition, tax law generally views them as one
overall transaction. Accordingly, such multi-step transactions can qualify for tax-free
treatment if the rules described above are satisfied. For example, an exchange offer in
which a subsidiary of the acquiror acquires target stock for acquiror voting stock
followed by a merger of the subsidiary into the target may qualify for tax-free treatment
under the “reverse triangular merger” rules described above. Multi-step transactions
involving a first-step offer provide an opportunity to get consideration to target
shareholders more quickly than would occur in single-step transactions, while also
providing tax-free treatment to target shareholders on their receipt of acquiror stock.
A tax-free spin-off or split-off that satisfies the requirements of Section 355 of the
Internal Revenue Code can be used in combination with a concurrent M&A transaction,
although there are limitations on the type of transactions that could be accomplished in a
tax-free manner as described in more detail below. For example, “Morris Trust” and
“Reverse Morris Trust” transactions effectively allow a parent corporation to separate a
business and combine it with a third party in a transaction that is tax free to parent and its
shareholders if certain requirements are met. In a traditional Morris Trust transaction, all
of the parent’s assets other than those that will be acquired by the third party are
transferred to a corporation that is spun off or split off to parent shareholders, and then
the parent immediately merges with the acquiror in a transaction that is tax free to parent
stockholders (i.e., involving solely stock consideration). By contrast, in a Reverse Morris
Trust transaction, all assets to be acquired by the third party are transferred to a
corporation that is spun off or split off to parent shareholders, and then the spin-off
company immediately merges with the acquiror in a transaction that is tax free to parent
stockholders.
In order to qualify as tax free to parent, the Morris Trust and Reverse Morris Trust
structures generally require, among other things, that the merger partner be smaller (i.e.,
that the shareholders of parent own more than 50% of the stock of the combined entity).
Recent examples of Reverse Morris Trust transactions include the pending spin-off by
Pfizer of its Upjohn off-patent branded drugs business and combination with Mylan, the
spin-off by CBS Corporation of CBS Radio and the combination of CBS Radio with
Entercom Communications Corp., and the spin-off by Hewlett Packard Enterprise of
certain software assets and combination with Micro Focus.
Certain requirements for tax-free treatment under Section 355 of the Internal
Revenue Code are intended to avoid providing preferential tax treatment to transactions
that resemble corporate-level sales. Under current law, a spin-off coupled with a tax-free
or taxable acquisition of parent or spin-off company stock will cause the parent to be
taxed on any corporate-level gain in the spin-off company’s stock if, as part of a plan (or
series of related transactions) that includes the spin-off, one or more persons acquire a
50% or greater interest in the parent or the spin-off company.
Acquisitions occurring either within the two years before or within the two years
after the spin-off are presumed to be part of such a plan or series of related transactions.
Treasury regulations include facts and circumstances tests and safe harbors for
determining whether an acquisition and spin-off are part of a plan or a series of related
transactions. Generally, where there have been no “substantial negotiations” with respect
to the acquisition of the parent or the spin-off company or a “similar acquisition” within
two years prior to the spin-off, a post-spin acquisition of the parent or the spin-off
company solely for acquiror stock will not jeopardize the tax-free nature of the spin-off.
Post-spin equity transactions that are part of a plan remain viable where the
historic shareholders of the parent retain a greater-than-50% interest (by vote and value)
in the parent and the spin-off company after the transaction. Where the merger partner is
larger than the parent or spin-off company to be acquired, it may be possible to have the
merger partner redeem shares or pay an extraordinary distribution to shrink its
capitalization prior to the combination.
Additional rules apply where the post-spin-off transaction is taxable to the former
parent shareholders (e.g., acquisitions involving cash or other taxable consideration).
Because post-spin transactions can cause a spin-off to become taxable to the parent
corporation and its shareholders, it is customary for the tax matters agreement entered
into in connection with a spin-off to impose restrictions with respect to such transactions,
and to allocate any resulting tax liability to the corporation whose acquisition or other
transaction after the spin-off triggered the tax.
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V.
Courts generally review deal protection devices under the enhanced scrutiny
analysis set out in Unocal and Revlon.346 The reviewing court will examine closely the
context of the board’s decision to agree to the deal protections. As the Delaware Court of
Chancery has stated, the reasonableness inquiry contemplated by Unocal and Revlon:
does not presume that all business circumstances are identical or that there
is any naturally occurring rate of deal protection, the deficit or excess of
which will be less than economically optimal. Instead, that inquiry
examines whether the board granting the deal protections had a reasonable
basis to accede to the other side’s demand for them in negotiations. In that
inquiry, the court must attempt, as far as possible, to view the question
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from the perspective of the directors themselves, taking into account the
real world risks and prospects confronting them when they agreed to the
deal protections.347
1. Break-Up Fees
Break-up fees can be triggered by different events. The most common break-up
fee triggers, which are generally considered unobjectionable by courts, are when the
target company terminates the agreement to enter into a superior proposal, or when the
acquiror terminates because the target board withdraws its recommendation in favor of
the transaction. A break-up fee can also be triggered by a transaction during a “tail”
period following termination for failure to obtain shareholder approval in circumstances
where an alternative acquisition proposal was made public prior to the shareholder vote,
and sometimes also by a breach of a provision of the agreement or failure to close by the
“drop dead” date. In such cases, acquirors have argued that targets should be “presumed”
to be acting against the deal at hand and in favor of the prospect of the alternative deal,
despite covenants prohibiting such actions.
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The Delaware Court of Chancery has stated that there is no accepted “customary”
level of break-up fees, but rather, that such fees (like all deal protections) should be
considered contextually and cumulatively:
If a target company has to pay a fee because its shareholders fail to approve the
merger, whether or not another deal had been proposed or agreed, that is called a “naked
no-vote” termination fee. Courts have expressed concern at the coercive effect that a
“naked no-vote” break-up fee can have on the shareholder vote and so, when they are
included at all, the size of a “naked no-vote” break-up fee relative to the equity value of
the target is typically lower than a break-up fee triggered in connection with an
alternative offer. In the Lear case, the Delaware Court of Chancery upheld a “naked no-
vote” termination fee in which the potential acquiror had the right to receive $25 million
if shareholders failed to approve the merger, whether or not another deal had been
proposed or agreed to.358 Lear’s board had agreed to sell the company to Carl Icahn in an
LBO. When faced with significant shareholder opposition to the transaction, Lear
obtained a slightly higher price in exchange for a “naked no-vote” termination fee equal
to 0.9% of the total deal value. The shareholders rejected the deal and the company paid
the termination fee. The plaintiffs then challenged the naked no-vote fee. Even though
the deal was a cash-out LBO that implicated Revlon, the Lear court upheld the fee, noting
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that the shareholders had in fact rejected the deal, that it was rational for Icahn to demand
such a fee as additional compensation in the event of a no-vote since he was effectively
bidding against himself at that stage of the deal, and that Delaware courts have previously
upheld naked no-vote termination fees of up to 1.4% of transaction value.359 In some
cases, purchasers are entitled to expense reimbursement up to a specified cap in the event
of a no-vote instead of a payment of a fixed amount. In any case, the payment upon a
naked no-vote rarely exceeds 1% of the target’s equity value.
The Delaware courts accept the need for “no-shop” clauses to extract the
maximum bids from potential acquirors and have held that it is “critical” that bargained-
for contractual provisions be enforced, including by awarding post-closing damages in
appropriate cases.360 This principle also comes into play when a party claims that a target
should be required to take actions in contravention of its obligations under a no-shop. In
the 2014 C&J Energy case, the Delaware Supreme Court reversed the grant of a
mandatory preliminary injunction that required the target company to shop itself in
violation of a contractually bargained no-shop provision.361 The Delaware Court of
Chancery had ruled that the board of the selling company had violated its fiduciary duties
and enjoined the stockholder vote for 30 days while the selling company could undertake
an active market check. The Delaware Supreme Court held that the judicial waiver of the
no-shop clause was an error because the buyer was an “innocent third party” and, even on
facts determined after trial, “a judicial decision holding a party to its contractual
obligations while stripping it of bargained-for benefits should only be undertaken on the
basis that the party ordered to perform was fairly required to do so, because it had, for
example, aided and abetted a breach of fiduciary duty.”362
Delaware courts are willing to police “no-shop” clauses to ensure that they are not
used to deny shareholders access to the best available transaction. For example, the
Delaware courts have refused to enforce no-shop provisions where the acquiror secured
the deal protection measure through its own misconduct, or where there are “viable
claims of aiding and abetting against the holder of third party contract rights.”363 In In re
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Del Monte Foods Co. Shareholders Litigation,364 the plaintiffs sought to enjoin the
enforcement of a no-shop provision by a group of private equity buyers in its proposed
$5.3 billion cash acquisition of Del Monte. The no-shop provision prevented Del Monte
from soliciting acquisition proposals after the signing of the merger agreement, once a
45-day go-shop period had passed. In evaluating the petition, the Delaware Court of
Chancery considered:
(1) whether the acquiror knew, or should have known, of the target
board’s breach of fiduciary duty; (2) whether the . . . transaction remains
pending or is already consummated at the time judicial intervention is
sought; (3) whether the board’s violation of fiduciary duty relates to policy
concerns that are especially significant; and (4) whether the acquiror’s
reliance interest under the challenged agreement merits protection in the
event the court were to declare the agreement enforceable.365
The Court ultimately determined that the factors weighed against enforcement of the no-
shop and enjoined the parties from enforcing the provision.
In QVC, the Delaware Supreme Court expressed concern that the highly
restrictive no-shop clause of the Viacom/Paramount merger agreement was interpreted by
the board of Paramount to prevent directors from even learning of the terms and
conditions of QVC’s offer, which was initially higher than Viacom’s offer by roughly
$1.2 billion.366 The Court concluded that the board invoked the clause to give directors
an excuse to refuse to inform themselves about the facts concerning an apparently bona
fide third-party topping bid, and therefore the directors’ process was not reasonable. And
in Phelps Dodge, the Delaware Court of Chancery stated that “no-talk” clauses that
prohibit a board from familiarizing itself with potentially superior third-party bids were
“troubling precisely because they prevent a board from meeting its duty to make an
informed judgment with respect to even considering whether to negotiate with a third
party.”367 Boards should therefore take care that a no-shop does not also function as a
“no-talk”—i.e., a clause that interferes with the board’s ongoing duty to familiarize itself
with potentially superior bids made by third parties.
In some cases it may be appropriate for the target company to negotiate for a “go-
shop” provision to ensure that it is able to properly “market-test” a transaction. Go-shops
provide a period after the merger agreement signing—usually 30 to 50 days—in which
the target may affirmatively solicit competing bids; after the go-shop period ends,
traditional no-shop restrictions apply, subject to possible variation regarding treatment of
bidders who emerged during the go-shop period. Go-shop provisions seldom result in
higher bids. The Delaware Court of Chancery considers that go-shops can sometimes be
useful but has stated that the absence of a go-shop provision is not per se unreasonable.368
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often been prohibited by standstill agreements because under certain circumstances, they
can lead to disclosure on the part of the target, or simply a leak, thus giving the
impression that the target is “in play.” The position that a target or bidder takes with
respect to a provision prohibiting requests for waivers should be evaluated based on the
particular circumstances in which the standstill is being negotiated.
In the 2012 Genomics case,369 Vice Chancellor Laster of the Delaware Court of
Chancery enjoined a target company from enforcing such an anti-evasion clause, which
he referred to as a “Don’t Ask, Don’t Waive” provision, in a “Revlon situation”. The
Court did not object to the bidder being prohibited from publicly requesting a waiver of
the standstill (which the Court understood would eviscerate the standstill the bidders had
agreed to by putting the target “into play”), but it held that directors have a continuing
duty to be informed of all material facts, including whether a rejected bidder is willing to
offer a higher price. The Court suggested that a “Don’t Ask, Don’t Waive” provision is
analogous to the “no-talk” provision held invalid in Phelps Dodge and is therefore
“impermissible because it has the same disabling effect as a no-talk clause, although on a
bidder-specific basis.”370
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One issue that is sometimes negotiated is whether the board may change its
recommendation when the directors determine that their fiduciary duties so require, or
may only do so in certain circumstances, such as in the context of a “superior proposal.”
Dicta in Delaware cases questions the validity of a merger agreement provision limiting
the board’s ability to change its recommendation to situations where a superior proposal
has been made, on the theory that directors’ fiduciary duties require the board to be able
to change its recommendation for any reason.373 In the Genomics case, Vice Chancellor
Laster made clear his view that Delaware boards should retain the right to change their
recommendation in compliance with their fiduciary duties, explaining that “fiduciary
duty law in this context can’t be overridden by contract” because “it implicates duties to
target stockholders to communicate truthfully.”374 Similarly, in In re NYSE Euronext
Shareholders Litigation,375 then-Chancellor Strine in dicta expressed skepticism towards
provisions that limit a board’s ability to change its recommendation and described them
as “contractual promises to lie in the future.” He also noted that, although such
provisions create litigation and deal risk, some companies accede to them in negotiations
to gain a higher price.
In some cases, practitioners have sought a middle course (which courts have not
addressed), drafting provisions that permit a change in recommendation in the absence of
a superior proposal only if there has been an “intervening event,” that is, a development
that was not known (with parties sometimes debating whether to also include
developments that were not reasonably foreseeable) at the time of signing which arises in
the period between signing and the shareholder vote. In recent years practitioners who
choose to include an “intervening event” concept have engaged in negotiations over the
precise definition of this term, and whether it should be permitted to include all new
facts, or whether certain categories of events should be excluded.
4. Shareholder Commitments
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The combination of a “force-the-vote” provision and a support agreement from a
controlling shareholder, effectively making approval of the transaction guaranteed, may
run afoul of controversial Delaware precedent. In 2003 in Omnicare, Inc. v. NCS
Healthcare, Inc.,377 the Delaware Supreme Court held that no merger agreement that
requires a shareholder vote can be truly “locked up,” even at the behest of controlling
shareholders and seemingly even at the end of a diligent shopping/auction process. This
ruling has made it more difficult for majority-controlled companies to attract the highest
and best offers from merger partners who may be reluctant to enter into a merger contract
with a fiduciary out. As Chief Justice Veasey noted in his dissenting opinion, by
“requiring that there must always be a fiduciary out, the universe of potential bidders who
could reasonably be expected to benefit stockholders could shrink or disappear.”378
Omnicare was immediately controversial and remains so, and in 2011, a California Court
of Appeal specifically declined to follow it.379
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shortly after signing a merger agreement. Although the Delaware Supreme Court has not
ruled on this issue, in 2011 in In re OPENLANE, Inc. Shareholders Litigation, the
Delaware Court of Chancery rejected an argument that a merger was an impermissible
“fait accompli” simply because the merger, which did not include a fiduciary out, was
approved by a majority of the shareholders by written consent the day after the merger
agreement was signed.383 However, it should be noted that transactions using a sign-and-
consent structure without a robust pre-signing market check may invite heightened
scrutiny under the Revlon standard, where applicable. Moreover, even when available
under a company’s governing documents, written consents may be disfavored where the
acquiror intends to issue registered stock to the target’s shareholders because the SEC
deems a consent approving a merger to constitute a private offering of the acquiring
company’s securities that precludes the acquiror from subsequently registering the
offering on Form S-4. The SEC staff takes the view that under such circumstances,
offers and sales of the acquiror’s stock have already been made and completed privately,
“and once begun privately, the transaction must end privately.”384
Information rights and matching rights are nearly universal in public company
merger agreements, and provide an acquiror with the opportunity to learn more
information about an interloper’s proposal and to improve its bid in response to such a
proposal. Specifically, information rights require a target to supply the buyer with
information about subsequent bids that may appear. The holders of such rights have an
informational advantage because they can prepare a revised bid with knowledge about
competing bids. What are loosely referred to as “matching rights” give the buyer the
opportunity, and sometimes an explicit right, to negotiate with the target for a period
before the target’s board can change its recommendation or terminate the agreement to
accept a competing offer under the fiduciary out. There are many variations of matching
rights. In a typical formulation, the buyer can match the first competitive bid and
subsequent amended bids, though sometimes the buyer only is given the opportunity to
match the first competitive bid.385 Parties will often debate the proper duration of
matching rights, with three to five business days being common for an initial match
period, and a shorter period—generally two to three business days—sometimes used for
amended bids.386
On the one hand, matching rights have been criticized because they can deter
subsequent bidders who do not wish to enter into a bidding contest. However, given that
public companies cannot lock up deals without some fiduciary out, competing bidders
cannot reasonably expect to avoid a bidding contest if the original buyer wants to pursue
one. In addition, because such rights reduce the uncertainty of consummating the
transaction for the initial acquiror, they can be useful in encouraging the potential
acquiror to make the investment to enter into a merger agreement.
Similarly, Delaware courts have routinely upheld information rights and matching
rights, noting that “the presence of matching rights in the merger agreement do[es] not
act as a serious barrier to any bidder” willing to pay more than the merger
consideration.387 However, in a 2018 appraisal action heard by the Delaware Court of
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Chancery, Blueblade Capital Opportunities LLC v. Norcraft Cos., the Court indicated
that a matching right providing the acquiror four business days to match a superior
proposal by a third-party and two business days to match any subsequent proposal by the
same bidder—a highly customary formulation, but one which the Court characterized as
an “unlimited” matching right—was one element of a post-signing market check that
“fell far short on many levels.”388 In so concluding, the Court noted the “disparity in the
sophistication” of the parties and found that the acquiror was “acutely aware of the
advantage it secured,” while the target’s board “did not understand what an unlimited
match right was much less how that deal protection might work to hinder the go-shop.”389
Thus, practitioners should be aware that matching rights without a pre-signing “market
check” in conjunction with an otherwise flawed market check may lead to scrutiny in the
Delaware courts, particularly if the target’s board is not fully aware of the potential
effects of the provision.
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Bear Stearns’ issuance of 39.5% of its common stock to JPMorgan in connection with
JPMorgan’s purchase of Bear Stearns, and further held that the directors also would have
satisfied their duties under Unocal or Revlon in light of the existential threat posed by the
2008 financial crisis.391 It bears noting that the dire circumstances of the crisis were
presumably on the judge’s mind when this case was decided.
c. Crown Jewels
For example, in 2012, in exchange for certain present and future cash payments,
AuthenTec granted Apple an option to acquire a nonexclusive license to its sensor
technology, separate and apart from the merger agreement between the two parties. In its
proxy disclosure about this option, AuthenTec was careful to stress the reputational
benefits of having public ties with Apple and the economic benefits of the expected
future cash stream from Apple. A Florida court denied a shareholder plaintiff’s
application to enjoin the transaction.395
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Generally, having an independent business purpose for the separate crown-jewel
arrangement will help the lock-up pass judicial muster. For example, in the 2013 merger
between NYSE Euronext (“NYSE Euronext”) and Intercontinental Exchange, Inc.
(“ICE”), ICE separately agreed with NYSE Euronext to act as the exclusive provider of
certain clearing services to NYSE Euronext’s European derivatives business for two
years, whether or not the merger took place. The parties extensively detailed the business
rationale for this agreement, mostly focusing on NYSE Euronext’s need for clearing
services regardless of whether the merger with ICE was consummated. In evaluating that
agreement under the Unocal standard, then-Chancellor Strine noted that there was “no
evidence in the record that presents a barrier to any serious acquiror” and that a topping
bidder could reach an economic solution with all parties concerned for a relatively small
sum.396 Delaware courts will examine the preclusive effects of such side commercial
arrangements on potential topping bidders in evaluating whether they are impermissible
crown-jewel lock-ups.
Because of the passage of time between the signing and closing of a transaction
(whether due to the need for regulatory or shareholder approvals or other reasons), the
target company will not be the same at closing as it was on the day the acquiror agreed to
buy it. The question becomes how much change is permissible before the acquiror will
have the right to refuse to close. Virtually all domestic public company merger
agreements allow the buyer to refuse to close if there has been a “material adverse effect”
on or a “material adverse change” in the target company’s business (although these
provisions are less common in acquisition agreements involving European companies).
This “MAE” or “MAC” clause is one of the principal mechanisms available to the parties
to a transaction to allocate the risk of adverse events transpiring between signing and
closing.
Until October 2018, common wisdom had been that the Delaware Court of
Chancery had never recognized an MAE of sufficient magnitude to provide the acquiror
the right to walk away from a deal. However, in Akorn, Inc. v. Fresenius Kabi AG, the
Court found that the target’s business had suffered an MAE and that the merger
agreement entered into by the parties allocated the risk of this event to the target, so that
the buyer was allowed to walk away from the deal.397 In a 246-page post-trial opinion,
Vice Chancellor Laster presented a highly fact-intensive inquiry that served to confirm
much of the existing Delaware jurisprudence regarding MAE clauses while providing
additional clarity and guidance in certain areas. The Vice Chancellor’s finding of an
MAE sufficient to prevent the target from obtaining a court order requiring specific
performance was upheld in December 2018 in a three-paragraph order issued by the
Delaware Supreme Court.398 Despite the unprecedented result, Akorn was decided
consistent with the overriding principle found in past Delaware cases addressing this
question; namely that acquirors face a steep climb when seeking to invoke an MAE and
that a court’s judgment as to such an argument’s merits will be based on a highly fact-
intensive inquiry as well as the actual contractual language agreed to by the parties.
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The Akorn case arose from the proposed acquisition of U.S.-based pharmaceutical
company Akorn, Inc. by Fresenius Kabi AG, a German drug maker. The parties entered
into a merger agreement on April 24, 2017 that contained a “customary” MAE
definition.399 However, within months Akorn’s “business performance fell off of a cliff,”
despite the fact that the company had reaffirmed its guidance for 2017 on the same day
that the proposed transaction with Fresenius was announced.400 Specifically, Akorn
suffered year-over-year quarterly revenue declines of greater than 25%, operating income
declines of more than 80%, and net income declines of more than 90% in each of the four
quarters after the parties entered into the merger agreement – declines which the Court
found were specific to Akorn’s business and not attributable to general industry issues.401
Additionally, Fresenius received a series of anonymous whistleblower letters accusing
Akorn of serious regulatory issues, resulting in an investigation that uncovered what the
Court deemed “serious and pervasive data integrity problems” that constituted a breach of
the representations related to regulatory compliance that Akorn had made in the merger
agreement.402 Eventually, on April 22, 2018, Fresenius notified Akorn that it was
terminating their agreement on several different grounds, including that Akorn’s business
had suffered an MAE.
While the Court ultimately agreed with Fresenius that Akorn had suffered an
MAE, it was also careful to reiterate certain key aspects of preexisting MAE
jurisprudence. For example, citing IBP, Inc. v. Tyson Foods (In re IBP, Inc.
Shareholders Litigation), the Court reiterated that the burden of proving an MAE rests
with the buyer and that an MAE must be a long-term effect rather than a short-term
failure to meet earnings targets, stating that “[a] short-term hiccup in earnings should not
suffice; rather the Material Adverse Effect should be material when viewed from the
longer-term perspective of a reasonable acquiror.”403 In other words, the effect on the
business should “substantially threaten the overall earnings potential of the target in a
durationally-significant manner.”404
At the same time, Akorn rejected the notion that MAE clauses contain an implicit
“anti-sandbagging principle” that would prevent an acquiror from utilizing the clause if it
had pre-transaction knowledge of the risks giving rise to the MAE. The Court declined to
adopt a standard restricting MAEs to unknown events, stating that to do so “would
replace the enforcement of a bargained-for contractual provision with a tort-like concept
of assumption of risk, where the outcome would turn not on the contractual language, but
on an ex-post sifting of what the buyer learned or could have learned in due diligence.”405
Although Akorn is the most robust recitation of the Delaware Courts’ views on
MAE clauses, it should be noted that the facts in Akorn were rather extreme. Parties
should continue to assume that it will be exceptionally difficult to prove an MAE in court
and thereby escape an unwanted deal. The Delaware Courts have reinforced this
principle following Akorn, including by rejecting claims in Channel Medsystems, Inc. v.
Boston Scientific Corp. that the falsification of documents that were included in key FDA
approval application constituted an MAE where the applicable approval was not delayed
past the timing anticipated by the parties.406 Further, the IBP case continues to be
important not only for its explanation of the MAE concept but also because the Court
ordered specific performance. The Court in IBP found that New York law applied,
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requiring the party seeking specific performance to establish its entitlement to that
remedy by the preponderance of the evidence (rather than, as in Delaware, by clear and
convincing evidence). The Court held that IBP had met its burden, reasoning that the
business combination between IBP and Tyson was a unique opportunity, that monetary
damages would be difficult to calculate and “staggeringly large,” and that the remedy was
practicable because the merger still made strategic sense.407
While then-Vice Chancellor Strine decided the IBP case under New York law,
Delaware courts have applied his analysis to merger agreements governed by Delaware
law.
While the prior discussion has focused on judicial precedent regarding claims that
an MAE had occurred, the presence of an MAE clause can also serve as a lever that the
acquiror can use in negotiations with a target that has suffered adverse developments
after entering into a definitive agreement. An acquiror claiming that a target MAE
occurred can put the target company in the difficult position of either litigating to enforce
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the original transaction terms (running the risk that the alleged MAE is established) or
accepting renegotiated terms, such as a reduced price.
Following the dramatic market downturn at the height of the LBO boom in the
summer of 2007, the MAE clauses in numerous merger agreements were implicated.
Some of these transactions were renegotiated (e.g., the acquisition of Home Depot’s
supply unit by an investor group led by Bain Capital), others were terminated by mutual
agreement of the parties (either with no strings attached, like the proposed merger
between MGIC Investment Corp. and Radian Group Inc., or with an alternative
arrangement such as the investment that KKR and Goldman Sachs made in Harman
International when they terminated their agreement to take Harman private), and a few
led to litigation. In 2016, Abbott Laboratories sued to enforce an MAE clause in its
merger agreement with Alere, claiming, among other things, that Alere’s governmental
investigations and delisting by the NYSE amounted to an MAE. In 2017, the parties
settled the litigation, agreeing to a reduction in purchase price from $5.8 billion to $5.3
billion.
MAE clauses have been further implicated by the COVID-19 pandemic, as such
provisions have become central in evaluating the contractual path forward for deals
pending during the crisis. The outcome of litigation involving the interpretation of such
provisions (including their interaction with covenants to operate in the ordinary course of
business) is likely to have lasting effects on the legal drafting of such provisions as well
as the allocation of risks in strategic transactions throughout the COVID-19 pandemic
and beyond.
During the LBO boom of 2005 to 2007, however, sellers were able to negotiate a
purportedly seller-friendly package of financing-related provisions from financial buyers
that typically included:
Reverse Termination Fee. The reverse termination fee required the buyer to
pay a fee in the event the buyer failed to close due to an inability to obtain
financing (expanded, in some instances, to a failure to close for any reason).
The reverse termination fee often was the seller’s sole remedy in the event of
a failure to close.
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Denial of Specific Performance. The acquisition agreement would often
provide that the seller could not obtain specific performance of the buyer’s
obligation to close, or could obtain such specific performance only in limited
circumstances.
Although originally intended to increase deal certainty for sellers, the net effect of
these features was to create a transaction structure that, depending on the specific terms
of the documentation, could resemble an option to buy the target, permitting the buyer to
walk away for a fixed cost (i.e., the reverse termination fee).
The credit crunch and financial crisis that began in 2007 put the paradigmatic
private equity structure to the test as buyers (and in some cases, lenders) decided to walk
away from, or renegotiate, signed deals that had not yet closed. While many of the
troubled deals were resolved consensually (including through price reductions and
terminations) rather than through litigation, a number of situations were judicially
resolved. For example, in United Rentals, Inc. v. RAM Holdings, Inc.,414 the Delaware
Court of Chancery respected provisions denying specific performance and giving the
buyer the right to terminate the deal upon payment of the reverse termination fee. In
Alliance Data Systems Corp. v. Blackstone Capital Partners V L.P.,415 the Court held that
the shell companies formed by a financial sponsor to effect the merger did not have a
contractual obligation to cause the sponsor, which was not a party to the merger
agreement, to do anything to obtain a regulatory approval that was a condition to the shell
companies’ obligations to close the merger. And in James Cable, LLC v. Millennium
Digital Media Systems, L.L.C.,416 the Court rejected claims, including for tortious
interference, against a financial sponsor arising out of its portfolio company’s alleged
breach of an asset purchase agreement, where the sponsor was not a party to the
agreement, did not enter into a written agreement to provide funding and did not make
enforceable promises to help fund the transaction.417
These market and judicial developments have influenced trends in private equity
transaction structuring for more than a decade. On the one hand, many private equity
transactions today chart a middle course, in which a reverse termination fee is payable
upon a financing failure, which also generally serves as the seller’s sole remedy, but the
seller retains a limited specific performance right to require the closing to occur
(including the ability to compel a draw-down of the equity financing) if the closing
conditions are satisfied and the debt financing is available. On the other hand, a majority
of strategic transactions continue to employ the traditional “full remedies” model, in
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which the seller is expressly granted the full right to specific performance and there is no
cap on damages against the buyer.
Symmetry between target termination fees and reverse termination fees has
become less common, with reverse termination fees often being higher. Although reverse
termination fees now frequently range from 4% to 10% of transaction value, some have
been higher, sometimes reaching well in excess of 10% of deal value, and in rare cases as
high as the full equity commitment of the sponsor. In addition, the acquisition
agreements governing many leveraged private equity transactions have obligated the
buyers to use efforts to force lenders to fund committed financing, and in a minority of
cases specifically require the pursuit of litigation in furtherance of this goal. Debt
commitment letters, however, usually do not allow targets to seek specific performance
directly against lenders or name targets as third-party beneficiaries. Lenders have in most
cases sought to include provisions directly in acquisition agreements that limit or mitigate
their own liability (commonly referred to as “Xerox provisions,” having been used in the
Xerox/ACS transaction). These provisions vary, but generally include: (1) limiting the
target’s remedy to the payment of the reverse termination fee; (2) requiring that any
action against the lenders be governed by New York law; (3) requiring that the buyer and
seller waive any right to a jury trial in any action against the lenders; and (4) making the
lender a third-party beneficiary of these provisions.
Another structure involves a grace period allowing buyers to try to force the
lenders to complete a financing. In the Berkshire Hathaway and 3G Capital acquisition
of Heinz, the parties agreed to a provision (sometimes referred to as a “ketchup
provision”) that provided that if the acquisition financing fell through, then the buyers
would have four additional months to obtain financing before Heinz would be entitled to
collect its reverse termination fee due to the buyer’s financing failure. Such provisions
help mitigate the risk related to obtaining financing. Another provision that has appeared
in some deals (such as the acquisition of Tommy Hilfiger by Phillips Van Heusen) has
been the introduction of a “ticking fee” concept, in which the purchase price increases by
a stated amount for each day that the closing is delayed beyond a specified target date.
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breach where specific performance is precluded by the merger agreement or otherwise
unavailable. As a result, targets have in some cases sought to address Con Ed by
including language in the merger agreement to the effect that damages for the buyer’s
breach should be calculated based on shareholder loss, or by choosing Delaware law
(under which the issue addressed in Con Ed has not been resolved) to govern the merger
agreement.420
The Hexion decision discussed above in Section V.B addressed another issue that
should be considered in negotiating contractual provisions relating to remedies, which is
whether post-termination liability should be limited or eliminated for certain types of
breaches. In Hexion, the merger agreement included a provision allowing uncapped
damages in the case of a “knowing and intentional breach of any covenant” and
liquidated damages of $325 million in the event of other enumerated breaches. The
Delaware Court of Chancery held that “a ‘knowing and intentional’ breach, as used in the
merger agreement, is the taking of a deliberate act, which act constitutes in and of itself a
breach of the merger agreement, even if breaching was not the conscious object of the
act.”421 Whether and how a party should seek to define such limitations on liability is a
question that should be considered in light of the particular circumstances.
the amount of the reverse termination fee(s), if any, and the trigger(s) for
payment;
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VI.
Hostile and unsolicited transactions have been an important part of the M&A
market over the past several decades. In 2019, they accounted for $311 billion of deal
activity, or approximately 8% of global M&A activity.
Advance preparation for defending against a harmful takeover may also be critical
to the success of a preferred transaction that the board has determined to be part of the
company’s long-term plan. As discussed in Chapter 2, a decision to enter into a business
combination transaction does not necessarily obligate a board to serve as auctioneer. In
the case of a merger or acquisition not involving a change-of-control, the board retains
the protection of the business judgment rule in pursuing its corporate strategy.422
Preparing to make a hostile bid also requires significant advance planning, as hostile
deals present unique challenges for acquirors: bids generally must be made without
access to non-public information about the target, premiums paid are generally higher in
transactions that begin on a hostile basis, and historically approximately two-thirds of
hostile or unsolicited bids have ultimately been withdrawn without a transaction being
completed with the initial bidder, with approximately half of targets of withdrawn
proposals remaining independent and half being sold to a third party.
Rights plans, popularly known as “poison pills,” are the most effective device for
deterring abusive takeover tactics and inadequate bids by hostile bidders. Rights plans do
not interfere with negotiated transactions, nor do they preclude unsolicited takeovers.
The evidence is clear, however, that rights plans do have the desired effect of forcing a
would-be acquiror to deal with a target’s board. In this regard, rights plans ultimately
may enable the board to extract a higher acquisition premium from an acquiror or deter
inadequate offers. Economic studies have concluded that, as a general matter, takeover
premiums are higher for companies with rights plans in effect than for other companies
and that a rights plan or similar protection increases a target’s bargaining power. See
Section VI.A.3. In addition, numerous studies have concluded that the negative impact,
if any, of adoption of a rights plan on a company’s stock price is not statistically
significant.
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Rights plans have long been the subject of active discussion and debate, and they
continue to contribute significantly to the structure and outcome of most major contests
for corporate control. This debate has only increased, as many companies have allowed
their rights plans to expire, have affirmatively terminated their rights plans, have
modified their rights plans with watered-down protections, or have agreed not to
implement rights plans going forward absent shareholder approval or ratification within
some period of time, generally one year. In addition, ISS updated its proxy voting policy
guidelines in November 2017 and will recommend an “against” or “withhold” vote for all
board nominees (except new nominees, who are considered case-by-case) if (i) the
company has a long-term rights plan (i.e., a rights plan with a term longer than one year)
that was not approved by the company’s shareholders or (ii) the board makes a material
adverse change to an existing rights plan (including extending or lowering the trigger)
without shareholder approval. Directors who adopt a rights plan with a term of one year
or less will be evaluated on a case-by-case basis, taking into account the disclosed
rationale for adoption and other factors as relevant, such as a commitment to submit any
renewal to a shareholder vote. ISS also has a general policy of recommending votes in
favor of shareholder proposals calling for companies to redeem their rights plans, to
submit them to shareholder votes or to adopt a policy that any future rights plan would be
put to a shareholder vote, subject to certain limited exceptions for companies with
existing shareholder-approved rights plans and rights plans adopted by the board in
exercise of its fiduciary duties that will be put to a shareholder ratification vote or will
expire within 12 months of adoption.
According to FactSet, over 3,000 companies at one point had adopted rights
plans, including over 60% of the S&P 500 companies. However, recent trends in
shareholder activism, as well as the ability of a board to adopt a rights plan on short
notice in response to a specific threat, have led to a marked decrease in their prevalence.
As of December 31, 2019, only 160 U.S.-incorporated companies, including 1% of the
S&P 500, had rights plans in effect. However, rights plans continue to be adopted by
small-cap companies that feel vulnerable to opportunistic hostile bids, companies
responding to unsolicited approaches, including by stockholder activists, and, as noted
below, companies putting in place so-called “Section 382” rights plans. During the
ongoing COVID-19 pandemic, some companies have adopted rights plans in the face of a
precipitous decline in their stock price. It remains to be seen whether such adoption will
become widespread or remain more limited in scope. In addition, many companies have
an up-to-date rights plan “on the shelf,” which is ready to be quickly adopted if and when
warranted, and a number of companies have refreshed these materials in the wake of the
COVID-19 pandemic. Consistent with its existing policy framework, ISS guidance
issued in April 2020 recognizes that a severe stock price decline as a result of the
COVID-19 pandemic is likely to be considered a valid justification in most cases for
adopting a rights plan of less than one year in duration. In assessing a company's
adoption of a rights plan, ISS will consider a board's explanation for its action, including
any imminent threats, and the specific plan provisions (triggers, terms, “qualified offer”
provisions and waivers for “passive” investors) of the pill.
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A rights plan also may be adopted to protect shareholders from so-called
“creeping” acquisitions of control whereby an acquiror may rapidly accumulate a
controlling block of stock in the open market or from one or more other shareholders.
However, rights plans are only an effective protection against creeping acquisitions to the
extent the company puts a rights plan in place before such activity occurs, and a company
may only become aware of creeping acquisitions after the shareholder has already
accumulated a significant position. For example, Pershing Square was able to acquire
16.5% of J.C. Penney before having to make any disclosure of its acquisition of shares.
J.C. Penney thereafter adopted a rights plan, but this only guarded against future
accumulations.
Rights plans may also be used to protect a corporation’s tax assets. Opportunistic
investors who see attractive buying opportunities may present special risks to
corporations with NOLs, “built-in” losses and other valuable tax assets. Accumulations
of significant positions in such a corporation’s stock could result in an inadvertent
“ownership change” (generally, a change in ownership by 5% shareholders aggregating
more than 50 percentage points in any three-year period) under Section 382 of the
Internal Revenue Code. If a company experiences an ownership change, Section 382 will
substantially limit the extent to which pre-change NOLs and “built-in” losses stemming
from pre-change declines in value can be used to offset future taxable income. As with
operating assets, boards of directors should evaluate the potential risks to these valuable
tax assets and consider possible actions to protect them. In the last five years,
approximately one hundred U.S. companies with significant tax assets have adopted
rights plans designed to deter a Section 382 ownership change, according to FactSet.
Such rights plans typically incorporate a 4.9% threshold, deterring new shareholders from
accumulating a stake of 5% or more, as well as deterring existing five-percent
shareholders from increasing their stake in a way that could lead to a Section 382
ownership change. ISS recognizes the unique features of such a rights plan and will
consider, on a case-by-case basis (despite the low threshold of such plans), management
proposals to adopt them based on certain factors—including, among others, the threshold
trigger, the value of the tax assets, other shareholder protection mechanisms and the
company’s governance structure and responsiveness to shareholders. ISS also states that
it will oppose any management proposal relating to a Section 382 pill if it has a term that
would exceed the shorter of three years or the exhaustion of the NOLs.
A rights plan can also be used as a deal protection device in connection with the
signing of a merger agreement. Rights plans in such cases may help protect a deal
against hostile overbids in the form of a tender offer and could deter activist shareholder
efforts to accumulate large numbers of shares and vote down a proposed merger. For
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example, in February 2019, after Entergis and Versum announced a merger-of-equals-
style all-stock merger, and an interloper (Merck) made an all-cash bid for Versum that
the Versum board found insufficient, Versum responded by adopting a 12.5% pill.
Versum later redeemed this pill after Merck increased its bid to a level the Versum board
found to be superior to the all-stock deal. In considering whether to adopt a rights plan
after signing a merger agreement, target boards have considered risks such as an
interloper making a hostile bid and an activist trying to buy stock to hold up the deal.
Hedge funds and other shareholder activists have used equity swaps and other
derivatives to acquire substantial economic interests in a company’s shares without the
voting or investment power required to have “beneficial ownership” for disclosure
purposes under the federal securities laws. Rights plans can be drafted to cover equity
swaps and other derivatives so as to limit the ability of hedge funds to use these devices
to facilitate change-of-control efforts, although careful consideration should be given as
to whether and how to draft a rights plan in this manner. One such rights plan was
challenged in a Delaware court, and although the Court denied a preliminary injunction
against the plan, the case was ultimately settled with the company making clarifications
to certain terms of the rights plan.423
The issuance of share purchase rights has no effect on the capital structure of the
issuing company. If an acquiror takes action that triggers the rights, however, dramatic
changes in the capital structure of the target company can result. The key feature of a
rights plan is the “flip-in” provision of the rights, the effect of which is to impose
unacceptable levels of dilution on an acquiror in specified circumstances. The risk of
dilution, combined with the authority of a target’s board to redeem the rights prior to a
triggering event (generally an acquisition of between 10% and 20% of the target’s stock,
or 5% in the case of a Section 382 rights plan), gives a potential acquiror a powerful
incentive to negotiate with the target’s board rather than proceeding unilaterally.
A rights plan should also provide that, once the triggering threshold is crossed, the
target’s board may exchange, in whole or in part, each right held by holders other than
the acquiror (whose rights are voided upon triggering the plan) for one share of the
target’s common stock. This provision avoids the expense of requiring rights holders to
exercise their flip-in rights, eliminates any uncertainty as to whether individual holders
will in fact exercise the rights and produce the intended dilution, and provides the board
additional flexibility in responding to a triggering event. The exchange provision was
used by the board of directors of Selectica when that pill was triggered by Trilogy in
January 2009, and upheld by the Delaware Supreme Court in October 2010 in response to
Trilogy’s challenge of that pill.424 In cases where the acquiring person holds less than
50% of a target’s stock, the dilution caused by implementation of the exchange feature is
substantial and can be roughly comparable to the dilution that would be caused by the
flip-in provision, assuming all eligible rights holders exercise their rights.
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Some companies have adopted rights plans that do not apply to a cash offer for all
of the outstanding shares of the company. More recent versions of this exception have
limited its scope to cash offers containing a specified premium over the market price of
the target’s stock. While a so-called “chewable pill” rights plan has some limited utility
and may avoid a shareholder resolution attack, it is not effective in many situations and
may create an artificial “target price” for a company that does not maximize shareholder
value. As discussed in the next subsection, a recent trend by some companies is to adopt
rights plans with bifurcated triggers (e.g., a higher trigger for Schedule 13G filers (i.e.,
passive investors) and a lower trigger for Schedule 13D filers) to allow their large, long-
term institutional investors to continue to accumulate shares even during an activist
situation, while placing a lower ceiling on potential “creeping control” by activists.
Rights plans, properly drafted to comply with state law and a company’s charter,
typically survive judicial challenge under a Unocal analysis.425 Furthermore, courts have
recognized rights plans as important tools available to boards to protect the interests of a
corporation.426
One of the most debated issues concerning rights plans focuses on whether or not
a board should be required to redeem the rights plan in response to a particular bid. In
this respect, courts applying Delaware law have upheld, or refused to enjoin,
determinations by boards not to redeem rights in response to two-tier offers, or
inadequate 100% cash offers,427 as well as to protect an auction or permit a target to
explore alternatives.428
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A second contested issue concerning rights plans is whether they may be adopted
to prevent accumulations of ownership outside of the context of an outright bid for the
company. On this point, the Delaware Court of Chancery has made it clear that the board
may act in response to legitimate threats posed by large stockholders. For instance, the
adoption of a rights plan to deter acquisitions of substantial stock positions was upheld by
the Delaware Court of Chancery in a case involving Ronald Burkle’s acquisition of
almost 18% of Barnes & Noble.430 Then-Vice Chancellor Strine held that the company’s
adoption of a rights plan with a 20% threshold that grandfathered the founding family’s
approximately 30% stake was a “reasonable, non-preclusive action to ensure that an
activist investor like [Burkle] did not amass, either singularly or in concert with another
large stockholder, an effective control bloc that would allow it to make proposals under
conditions in which it wielded great leverage to seek advantage for itself at the expense
of other investors.”431 In the Barnes & Noble case, the Court upheld the rights plan’s
prohibitions on “acting in concert” for purposes of a proxy contest and noted that the key
question was whether the rights plan “fundamentally restricts” a successful proxy contest.
In defining the behavior that might trigger a rights plan, the Court seemed to suggest that
triggers should be based on the well-recognized definition of beneficial ownership in
Section 13D of the Exchange Act. However, this is an unsettled point of law and, in
appropriate circumstances, companies are well-advised to consider adopting rights plans
that encompass aggregations of voting or economic interests through synthetic
derivatives that decouple the traditional bundle of rights associated with outright common
stock ownership. In the recent July 2020 bench ruling by Vice Chancellor Laster in In re
Versum Materials, Inc. Stockholder Litigation, a mootness case, Vice Chancellor Laster
awarded plaintiff $12 million in fees and noted his concerns with the “truly expansive”
“acting in concert” clause in question.432
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seeking to control the strategic direction of the company can pose a threat against which
boards may properly take defensive action.
Rights plans have also been upheld outside of the corporate control context. In
Versata Enterprises, Inc. v. Selectica, Inc., the Delaware Supreme Court rejected a
Unocal challenge to the use of a “Section 382” rights plan with a 4.99% trigger designed
to protect a company’s NOLs, even when the challenger had exceeded the threshold and
suffered the pill’s dilutive effect.434 First, the Court concluded that the board had
reasonably identified the potential impairment of the NOLs as a threat to Selectica.
Second, the Court held that the 4.99% rights plan was not preclusive. Explaining that a
defensive measure cannot be preclusive unless it “render[s] a successful proxy contest
realistically unattainable given the specific factual context,” the Court credited expert
testimony that challengers with under 5% ownership routinely ran successful proxy
contests for micro-cap companies. The Court sharply rejected Trilogy’s contention that
Selectica’s full battery of defenses was collectively preclusive, holding that “the
combination of a classified board and a Rights Plan do[es] not constitute a preclusive
defense.” Finally, the Court held that the adoption, deployment and reloading of the
4.99% pill was a proportionate response to the threat posed to Selectica’s tax assets by
Trilogy’s acquisitions.
When a board rejects an unsolicited bid and refuses to redeem its poison pill, the
tactic of choice for the bidder is often to combine a tender offer with a solicitation of
proxies or consents to replace a target’s board with directors committed to considering
the dismantling of a rights plan to permit the tender offer to proceed. The speed with
which this objective can be accomplished depends, in large part, upon the target’s charter
and bylaws and any other defenses that the target has in place. In Delaware, shareholders
can act by written consent without a meeting of shareholders unless the certificate of
incorporation prohibits such action, and can call a special meeting between annual
meetings if permitted under a target’s certificate of incorporation or bylaws.
Some companies without staggered boards have adopted rights plans redeemable
only by vote of the continuing directors on the board (i.e., the incumbent directors or
successors chosen by them)—a so-called “dead hand” pill. Variations of this concept
come in a variety of forms, such as so-called “nonredemption” or “no hand” provisions,
which typically provide that the board cannot redeem the rights plan once the continuing
directors no longer constitute a majority of the board. This limitation on redemption may
last for a limited period or for the remaining life of the rights plan. Another variant is the
“limited duration” or “delayed redemption” dead hand pill, whereby the dead hand or no
hand restriction’s effectiveness is limited to a set period of time, typically starting after
the continuing directors no longer constitute a majority of the board. The use of dead
hand and no hand provisions was effectively foreclosed by Delaware case law
over 20 years ago, although courts in Georgia and Pennsylvania have upheld their
validity.435
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B. Staggered Boards
At year-end 2019, nearly 90% of S&P 500 companies did not have staggered
boards, and these companies generally would be unable to reclassify their boards if a
takeover threat materialized because shareholder approval would be required. Where a
target’s charter does not prohibit action by written consent, the target does not have a
staggered board and shareholders can fill vacancies, a bidder for a Delaware corporation
generally can launch a combined tender offer/consent solicitation and take over the
target’s board as soon as consents from the holders of more than 50% of the outstanding
shares are obtained. Even if the target’s charter prohibits action by written consent and
precludes shareholders from calling a special meeting, a target without a staggered board
can essentially be taken over in under a year by launching a combined tender offer/proxy
fight shortly before the deadline to nominate directors at the target’s annual meeting. In
contrast, a target with a staggered board may be able to resist a takeover unless a bidder
successfully wages a proxy fight over two consecutive annual meetings—a point well-
illustrated by Airgas’ ultimately successful takeover defense described in Section VI.A.2
above notwithstanding a successful proxy fight by Air Products to elect its nominees for
one-third of the Airgas board. Accordingly, where available, a staggered board continues
to be a critical component of an effective takeover defense strategy.
Defensive charter and bylaw provisions typically do not purport to, and will not,
prevent a hostile acquisition. Rather, they provide some measure of protection against
certain takeover tactics and allow a board additional negotiating leverage, as well as the
opportunity to respond appropriately to proxy and consent solicitations. Defensive
charter provisions (in addition to staggered board provisions) include: (1) provisions that
eliminate or limit shareholder action by written consent or eliminate or limit the right of
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shareholders to call a special meeting; (2) provisions limiting the ability of shareholders
to alter the size of a board or to fill vacancies on the board; (3) “fair price” provisions
(which require that shareholders receive equivalent consideration at both ends of a two-
step bid, thus deterring coercive two-tier, front-end-loaded offers); and (4) “business
combination” provisions (which typically provide for supermajority voting in a wide
range of business combinations not approved by the company’s continuing directors, if
the transaction does not meet certain substantive requirements).
ISS has adopted voting guidelines to address bylaws adopted unilaterally without
a shareholder vote. ISS will generally recommend that stockholders vote against or
withhold votes from directors individually, committee members or the entire board
(except new nominees who should be considered case-by-case) if the board “amends the
company’s bylaws or charter without shareholder approval in a manner that materially
diminishes shareholders’ rights or that could adversely impact shareholders,” considering
specified factors. Unless it is reversed or submitted to a binding shareholder vote, ISS
will make voting recommendations on a case-by-case basis on director nominees in
subsequent years, and will generally recommend voting against if the directors classified
the board, adopted supermajority vote requirements to amend the bylaws or charter, or
eliminated shareholders’ ability to amend bylaws.
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Companies should review their bylaws on a regular basis to ensure that they are
up to date and consistent with recent case law and SEC developments, and to determine
whether modifications may be advisable. The most significant of these bylaw provisions
are discussed in detail below.
Although the validity of advance notice bylaws has been established in many
court decisions, such provisions are not immune from legal challenge. In 2012, for
example, the Delaware Court of Chancery granted a motion to expedite a claim brought
by Carl Icahn alleging that the directors of Amylin Pharmaceuticals had breached their
fiduciary duties by enforcing the company’s advance notice bylaw provision and refusing
to grant Mr. Icahn a waiver to make a nomination following the company’s rejection of a
third-party merger proposal after the advance notice deadline.438 In December 2014,
however, the Delaware Court of Chancery alleviated some of the concerns raised by the
Amylin decision. The court clarified that, in order to enjoin enforcement of an advance
notice provision, a plaintiff must allege “compelling facts” indicating that enforcement of
the advance notice provision was inequitable (such as the board taking an action that
resulted in a “radical” change between the advance notice deadline and the annual
meeting).439 Consistent with this decision, in August 2017, Automatic Data Processing
refused to accede to Pershing Square’s request to extend the advance notice deadline for
director nominations so that Pershing Square could have additional time to determine the
nominees for its dissident slate. While Delaware law does not call into question the
permissibility or appropriateness of advance notice bylaws as to director nominations,
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shareholder business or other matters, they show that the applicability of such bylaws to
all shareholder nominations and proposals should be made explicit and that enforcement
of such bylaws should be equitable. In 2018, a New York trial court applying New York
law enjoined Xerox’s Board from enforcing the company’s advance notice bylaw
provision where the company announced a strategic transaction following the notice date,
reasoning that a waiver of the notice provision was warranted because Xerox had
undergone “a material change in circumstances” after the deadline.440
In an important decision in January 2020, the Delaware Supreme Court upheld the
right of a company responding to a shareholder proposal or nomination to insist on strict
adherence to the requirements, including deadlines, unambiguously specified in advance
notice bylaws, “particularly one that had been adopted on a ‘clear day.’”441 In the context
of a contested election, companies should carefully review nominations and submissions
for compliance and accuracy, consider appropriate action to enforce bylaw requirements
and insist that nominating stockholders and their nominees complete appropriate
questionnaires and submit timely, accurate and complete answers to follow-up inquiries
where permitted. An orderly and transparent process, ensuring that the board has all of
the information it needs to make an informed recommendation to stockholders, and that
investors are apprised of the eligibility and suitability of dissident candidates, benefits the
company and all shareholders.
2. Meetings
Some bylaws specify a particular date or month for an annual meeting. Such
provisions should be amended to provide more flexibility and discretion to the board to
set an annual meeting date. A board should be authorized to postpone previously
scheduled annual meetings upon public notice given prior to the scheduled annual
meeting date. Section 211 of the DGCL, however, provides that if an annual meeting is
not held for thirteen months, the Delaware Court of Chancery may summarily order a
meeting to be held upon the application of any stockholder.443
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As a matter of good planning, companies should also be alert to timing issues
when undertaking friendly transactions. For instance, if a transaction is signed at a time
of year near an upcoming annual meeting, management may consider putting the
proposal to approve the merger on the agenda of the annual meeting rather than calling a
special meeting. This, however, can be a trap for the unwary, as shareholder (and thus
hostile bidder) access to the annual meeting agenda is often more liberal than to special
meeting agendas, and, if an annual meeting must be significantly delayed past the one-
year anniversary of the prior year’s meeting (e.g., due to an extended SEC comment
process in connection with the merger proxy), under many standard notice bylaws, a later
deadline for valid submissions of shareholder proposals may be triggered. Once
triggered, this could enable a potential interloper to run a proxy contest or otherwise
interfere with the shareholder vote. In many cases, the special meeting approach will be
the right choice. In addition, many companies have had to resort to hosting virtual (as
opposed to physical) annual and special meetings as a result of lockdown restrictions,
which may increase the ability of interlopers or activists to participate.
3. Vote Required
If the corporation’s charter does not disallow action by shareholder consent in lieu
of a meeting, the bylaws should establish procedures for specifying the record date for
the consent process, for the inspection of consents and for the effective time of consents.
Delaware courts have closely reviewed procedures unilaterally imposed by a board with
respect to the consent process to determine whether their real purpose is to delay and
whether the procedures are unreasonable.445 Delaware courts have rejected various other
limitations and procedures established without shareholder approval, including minimum
periods of time that a consent solicitation must stay open prior to a consent action taking
effect, permitted time frames for taking such action and the ability of a company to deem
a consent action ineffective if legal proceedings have been commenced questioning the
validity of such action.446
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offer will be reviewed under the Unocal standard, and possibly under Blasius Industries,
Inc. v. Atlas Corp.447 as discussed in Section II.B.2.c. The most common forms of such
after-the-fact defensive bylaws change the date of a shareholder meeting in the face of a
proxy contest or change the size of the board. In a series of decisions, the Delaware
courts have generally accepted that boards can delay shareholder meetings (by bylaw
amendment or adjournment) where there is “new information” or a change in position by
the board.448
In recent years, many companies have adopted forum selection provisions to help
reign in the cost of multiforum shareholder litigation. These forum selection provisions
generally cover derivative lawsuits, actions asserting breaches of fiduciary duty, actions
arising from the state of incorporation’s business code, and actions asserting claims
governed by the internal affairs doctrine.
In March 2020, the Delaware Supreme Court reversed a 2018 Delaware Chancery
Court decision and ruled that exclusive forum provisions in corporate charters that
require claims under the Securities Act to be brought in federal court are permissible
under Delaware law. The Court observed that as a matter of Delaware statute, a charter
may regulate “intra-corporate affairs” – all matters “defining, limiting and regulating the
powers of the corporation, the directors and the stockholders,” and that because a
Securities Act claim may raise such matters, such a federal forum provision is not
necessarily invalid. The Court’s reasoning applies to the inclusion of such provisions in
bylaws as well. Importantly, the Court’s decision rejected a facial challenge to such
federal forum provisions, but did not endorse their application in every circumstance.456
7. Fee-Shifting Bylaws
Although it is common in some jurisdictions outside the United States for the
losing party to pay the prevailing party’s attorneys’ fees and costs, under the majority
rule in the United States each party must pay its own attorneys’ fees and costs, regardless
of the outcome of the litigation. The Delaware Supreme Court in ATP Tour, Inc. v.
Deutscher Tennis Bund, on a question of law certified to it from the District Court for the
District of Delaware, held that a board-adopted fee-shifting bylaw that imposed the costs
of litigation on a non-prevailing plaintiff in a private non-stock corporation is facially
valid under Delaware law.457 In so ruling, the Delaware Supreme Court recognized that a
“bylaw that allocates risk among parties in intra-corporate litigation” relates to the
conduct of the affairs of the corporation.458 The Delaware Supreme Court cautioned that
a fee-shifting bylaw enacted for an improper purpose would be invalid, even if the board
had authority to adopt it in the first instance.
In response to the ATP case, the Delaware legislature adopted amendments to the
DGCL providing that neither the certificate of incorporation nor the bylaws may contain
“any provision that would impose liability on a stockholder for the attorneys’ fees or
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expenses of the corporation or any other party in connection with an internal corporate
claim.”459 Although the statutory amendments bar fee-shifting provisions in stock
corporations, they specifically do not apply to non-stock corporations, and thus leave the
holding of ATP intact. In 2016, the Delaware Court of Chancery struck down a bylaw
that purported to shift fees for any stockholder bringing an action in violation of the
corporation’s forum selection bylaw, thus confirming that Section 109(b) of the DGCL
bars even limited fee-shifting bylaws for public corporations.460
In order to attract and retain executives, most major companies have adopted
executive compensation programs containing change-of-control protections for senior
management. Change-of-control employment agreements or severance plans are not
defensive devices intended to deter sales or mergers. Instead, they are intended to ensure
that management teams are not deterred from engaging in corporate transactions that are
in the best interests of shareholders on account of the potential adverse effects those
transactions may have on management’s post-transaction employment. A well-designed
change-of-control employment agreement or severance plan should neither incentivize
nor disincentivize management from engaging in a transaction on the basis of personal
circumstances. Additionally, such arrangements assist in retaining management through
a period of uncertainty during which executives would otherwise have significant
incentive to pursue alternative opportunities.
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The severance benefits must be sufficient to ensure neutrality and retention, but
not so high as to be excessive or to encourage the executive to seek a change of control
when it is not in the best interests of the company and its shareholders. For the most
senior executives at public companies, a multiple of an executive’s annual compensation
(e.g., two or three times) is the standard severance formula in most industries.
“Compensation” for this purpose generally includes base salary and annual bonus (based
on a fixed formula, usually related to the highest or average annual bonus over some
period, or target bonus) and in some cases, accruals under qualified and supplemental
defined benefit pension plans. In addition, severance benefits typically include welfare
benefit continuation during the severance period. In the change-of-control context,
severance is customarily paid in a lump sum within a specified period of time following a
qualifying termination, as opposed to installment payments, which prolong a potentially
strained relationship between the executive and the former employer.
Companies should periodically analyze the impact the golden parachute excise tax
would have in the event of a hypothetical change of control. The excise tax rules, for a
variety of reasons, can produce arbitrary and counter-intuitive outcomes that penalize
long-serving employees as compared to new hires, promoted employees as compared to
those who have not been promoted, employees who do not exercise options compared to
those who do, employees who elect to defer compensation relative to those who do not,
and that disadvantage companies and executives whose equity compensation programs
include performance goals. Indeed, companies historically implemented gross-ups
because they were concerned that the vagaries of the excise tax would otherwise
significantly reduce the benefits intended to be provided under the agreement and that
such a reduction might undermine the shareholder-driven goals of the agreement. As
gross-ups have become less prevalent, the importance of understanding the impact of the
excise tax has increased, and companies and executives should consider excise tax impact
and mitigation techniques in the context of compensation design.
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In addition to individual change of control agreements, some companies have
adopted so-called “tin parachutes” for less senior executives in order to formalize
company policies regarding severance in the change of control context. Because of the
number of employees involved, careful attention should be paid to the potential cost of
such arrangements and their effect on potential transactions, but well-designed broad-
based severance arrangements can help ensure stability across a company’s workforce at
a time when the company is otherwise vulnerable to attrition.
Companies should also review the potential impact of a change of control on their
stock-based compensation plans. Because a principal purpose of providing employees
with equity incentives is to align their interests with those of the shareholders, plans
should contain provisions for the acceleration of equity compensation awards upon a
change-of-control (“single-trigger”) or upon a severance-qualifying termination event
following a change-of-control (“double-trigger”). There has been a trend in recent years
towards double-trigger vesting, although a significant minority of public companies still
provide for single-trigger vesting. Additionally, companies should confirm that their
stock-based plans include adjustment clauses authorizing the company to make
appropriate modifications to awards in the event of a transaction – e.g., conversion of
target awards into acquiror awards of comparable value.
E. “Poison Puts”
Debt instruments may include provisions, sometimes known as “poison puts,” that
allow debtholders to sell or “put” their bonds back to the issuing corporation at a
predetermined price, typically at par or slightly above par value, if a defined “change-of-
control” event occurs. Poison puts began to appear in bond indentures during the LBO
boom of the 1980s in response to acquirors’ practice of levering up targets with new debt,
which in turn led to ratings downgrades and a decline in the prices of the targets’ existing
bonds. The inclusion of these protections, which generally cover mergers, asset sales and
other change-of-control transactions, as well as changes in a majority of the board that is
not approved by the existing directors (the latter being sometimes referred to as a “proxy
put”), is generally bargained for by debtholders and therefore is assumed to lead to better
terms (such as lower pricing) for the borrower.
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More recently, proxy puts have come under fire in Delaware courts because of
their perceived use as an entrenchment device. In 2009, in San Antonio Fire & Police
Pension Fund v. Amylin Pharmaceuticals, Inc., the Delaware Court of Chancery held that
the board has the power, and so long as it is complying with the contractual implied duty
of good faith and fair dealing to the debtholders, also the right, to “approve” a dissident
slate of director nominees for purposes of a proxy put in the company’s bond indenture,
even while the board is conducting a public campaign against them.463 An indenture that
precluded the board from deciding whether or not to “approve” the slate (known as a
“dead hand proxy put”) would have “an eviscerating effect on the stockholder franchise”
and would “raise grave concerns” about the board’s fiduciary duties in agreeing to such a
provision.464 The Court also clarified that the board is “under absolutely no obligation to
consider the interests of the noteholders” in determining whether to approve the dissident
slate.465
In its 2013 decision in Kallick v. SandRidge Energy, Inc., the Delaware Court of
Chancery cast further doubt on the effectiveness of proxy puts. SandRidge applied
Unocal’s intermediate standard of review both to a board’s decision to agree to poison
put provisions in the first place and its subsequent conduct with respect to such
clauses.466 Citing Amylin, then-Chancellor Strine held that a board must approve a
dissident slate for purposes of a proxy put unless “the board determines that passing
control to the slate would constitute a breach of the duty of loyalty, in particular, because
the proposed slate poses a danger that the company would not honor its legal duty to
repay its creditors.”467 According to then-Chancellor Strine, a board may only decline to
approve dissident nominees where the board can “identify that there is a specific and
substantial risk to the corporation or its creditors posed by the rival slate” (such as by
showing the nominees “lack the integrity, character, and basic competence to serve in
office,” or where the dissident slate has announced plans that might affect the company’s
ability to “repay its creditors.”)468 Thus, even though the SandRidge board believed itself
to be better qualified and prepared to run the company than the dissident nominees, the
Court enjoined the incumbent directors from opposing a control contest until they
approved their rivals so as to satisfy the put.469
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put could chill shareholder action even without an actual proxy contest underway.473 The
Court thus concluded that approving a dead hand proxy put could subject directors to
personal liability for breaching their fiduciary duty of loyalty, and could open up
financing sources to liability for aiding and abetting the breach.474 Unsurprisingly, class
actions alleging breaches of directors’ fiduciary duties on the basis of proxy put
provisions are on the rise nationwide.475
Because of the case law described above, the Delaware Court of Chancery’s 2015
pronouncement that a proxy put might be so difficult to use that it is akin to a “toothless
bulldog” rings true.476 Indeed, when the case was later settled, the credit agreement was
amended to eliminate the proxy put (without any payment to the lenders for agreeing to
the amendment) and the company agreed to pay up to $1.2 million in attorneys’ fees.
Because of the difficulty of acquiring control of a target without the support of its
board, most initial takeover approaches are made privately and indicate a desire to agree
to a negotiated transaction. Acquirors generally begin their approach with either: (i) a
“casual pass” where a member of the acquiror’s management will contact a senior
executive or director of the target and indicate the desire to discuss a transaction; or
(ii) through a private bear-hug letter. Bear-hug letters come in various forms and levels
of specificity but generally are viewed as a formal proposal to the target to engage in a
transaction, and in certain circumstances may be interpreted by the target as triggering a
disclosure obligation.
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A key tactical consideration for an acquiror in this context is whether to suggest,
implicitly or explicitly, that the acquiror is willing to take the proposal directly to the
target’s shareholders if a negotiated deal is not reached. One the one hand, from the
acquiror’s perspective, a public approach may be advantageous in maximizing
shareholder and public pressure on the target board to enter into negotiations. In this
context, it may be difficult in practice for a target board to refuse to engage, regardless of
how strong the target’s structural takeover defenses may be.
On the other hand, a public approach or leak may disadvantage the bidder in a
number of ways: it will typically cause the target’s stock price to increase; it decreases
the likelihood of receiving due diligence access and otherwise reaching a negotiated
transaction, which, among other things, makes obtaining regulatory approvals more
challenging; it may distract or strain the target’s management, employees and business
relationships in ways that decrease value; and it may negatively affect the bidder’s own
stock price, decreasing the value or increasing the dilutive effect of any consideration
proposed to be paid in bidder stock.
2. Other Considerations
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to replicate but not necessarily beat the index that may not be relevant to active managers
who are more focused on price.
Acquirors that are existing large shareholders of the target and subject to the
SEC’s 13D reporting requirements must carefully evaluate the point at which any plans
or proposals should be publicly disclosed. Historically, acquirors often only filed 13D
amendments upon signing of a merger agreement (in a friendly transaction) or when the
acquiror otherwise decided for strategic reasons to publicly announce a bid/proposal.
However, in March 2015, the SEC charged eight directors, officers and major
shareholders of three separate issuers for failing timely to disclose in Schedule 13Ds
steps taken to take the issuers private, resulting in cease-and-desist orders and payment of
civil penalties. The SEC actions indicate that the SEC may focus on 13D compliance in
the going-private context.
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changing its shareholder base. These short-term investors’ objectives will necessarily
conflict with the company’s pursuit of a standing, long-term plan and they will most
often apply pressure to the board to accept a bid, with less regard to its adequacy.
Because there are a limited number of ways to acquire control of a target without the
support of its board—i.e., through a tender offer, a stock purchase, or a combined tender
offer and proxy contest—and each available hostile acquisition method is riskier and
provides less certainty for the potential acquiror than a negotiated transaction, most initial
takeover approaches are made privately and indicate a desire to agree to a friendly
transaction. Determining if disclosure is required in response to a private takeover
approach or preliminary merger negotiations is a factually driven inquiry. The two
guiding factors in this inquiry are: (i) whether information about the acquisition proposal
is material and (ii) whether the target has a duty to disclose the approach.
In a 2018 decision, the Tenth Circuit held that a party engaged in merger
discussions had no duty to disclose such discussions when it had not made any statements
that were “inconsistent” with the existence of such discussions. In addition, it found that
such discussions were not material under the Basic v. Levinson test “in the absence of a
serious commitment to consummate the transaction.”481
2. Other Considerations
During a takeover defense, every decision is tactical and must align with the
target’s defensive strategy. No conversation with a hostile bidder should be assumed to
be off the record and any signs of encouragement, self-criticism or dissension within the
board can be used against the company. Consequently, the board should carefully craft a
formal response. Except in the case of a publicly disclosed tender offer, there is no
defined period in which a company must respond to an offer. And, there is no duty to
negotiate, even in the face of a premium bid.
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H. Defending Against an Unsolicited Offer
Unless the target has otherwise subjected itself to Revlon duties (e.g., by having
previously agreed to enter into an acquisition involving a change-of-control, as in QVC),
it seems clear that the target may, if it meets the relevant standard, “just say no” to an
acquisition proposal.
The ability of a board to reject an unsolicited offer by relying on its rights plan
was reaffirmed in Airgas, as discussed in Sections II.B.2.b and VI.A.2. The Airgas board
rejected a series of increasing tender offers from Air Products because it found the price
to be inadequate, and the Delaware Court of Chancery upheld the primacy of the board’s
determination, even though Airgas had lost a proxy fight to Air Products for one-third of
the company’s staggered board.493
However, while a rights plan is often the most useful tool for staving off a hostile
bid, it is not necessary to successfully “just say no” in every situation. What is typically
necessary—and what a rights plan is designed to protect—is a thoughtful long-term plan
that was developed by a board and management whom long-term shareholders trust to
deliver value.
This proposition was on full display in Perrigo’s 2015 defense of Mylan’s $35.6
billion takeover bid—the largest hostile takeover battle in history to go to the tender offer
deadline. In April 2015, Mylan made an exchange offer to acquire Perrigo (which had
inverted from Michigan to Ireland). Perrigo’s board rejected the bid because it believed
it undervalued the company. As an Irish company, Perrigo was prevented from adopting
typical, U.S.-style defenses, such as a rights plan, by a prohibition under the Irish
Takeover Rules on the taking of “frustrating actions” in response to a bid. Consequently,
Perrigo’s best defense was to convince its shareholders that the value of a stand-alone
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Perrigo exceeded the value of a combined Mylan/Perrigo plus the offer’s cash
consideration and that the risk of owning Mylan shares—from a valuation and
governance perspective—was significant. Ultimately, more than 60% of Perrigo’s
shareholders rejected Mylan’s bid, which resulted in the failure to satisfy the minimum
tender condition and defeated the takeover attempt.
While Mylan’s bid was outstanding, there was considerable speculation about
whether merger arbitrageurs seeking short-term gains, who had acquired almost 25% of
Perrigo’s shares, would be able to deliver Perrigo into Mylan’s hands. Much was also
made of the fact that Perrigo did not agree to sell to a white knight or to do large
acquisitions of its own, raising questions about whether a premium offer, even a
questionable one, had put Perrigo on a “shot clock” to do the least bad deal that it could
find. It did not. The Perrigo situation shows that a target company can win a takeover
battle and defeat short-term pressures by pursuing a shareholder-focused stand-alone
strategy, especially where it fights for and wins the backing of its long-term shareholders.
A white squire defense, which involves placing a block of voting stock in friendly
hands, may be more quickly implemented. This defense has been successfully employed
in a handful of instances, and the Delaware Court of Chancery has upheld the validity of
this defense under the right circumstances.495 Such sales to “friendly” parties should be
carefully structured to avoid an unintended subsequent takeover bid by the former
“friend.” Voting and standstill agreements are critical components in this context.
Note that where a company is the target of a tender offer, Schedule 14d-9 requires
enhanced disclosures relating to its pursuit of alternative transactions to the tender offer,
such as when the target is pursuing a white knight or white squire defense. Targets of a
tender offer must disclose whether they are “undertaking or engaged in any negotiations
in response to the tender offer that relate to … [a] tender offer or other acquisition of the
[target] company’s securities” as well as “any transaction, board resolution, agreement in
principle, or signed contract that is entered into in response to the tender offer that relates
to” such undertaking or negotiations in response to the tender offer.496 These disclosure
obligations risk making certain negotiations public before the target has a fully negotiated
transaction with a third party. Accordingly, these disclosure obligations need to be
carefully reviewed and managed where a tender offer target is considering alternative
transactions as a takeover defense.
3. Restructuring Defenses
Like many forms of takeover defenses, a restructuring is best initiated well before
a company is actually faced with a bid. In most cases, a restructuring will only be
possible if there has been careful advance preparation by the company and its investment
bankers and counsel. Arranging for a friendly buyer of a particular asset and
restructuring a business to accommodate the loss of the asset are time-consuming, costly
and complicated endeavors and are difficult to effect in the midst of a takeover battle.
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Nonetheless, restructuring defenses have been attempted or implemented in a
number of prominent transactions. For example, during the course of BHP Billiton’s
effort to acquire global mining giant Rio Tinto, Rio Tinto announced in late 2007 its
decision to divest its aluminum products business (Alcan Engineered Products) and
instead focus on its upstream mining businesses. BHP ultimately dropped its bid for Rio
Tinto in November 2008, although it publicly attributed this decision to turmoil in the
financial markets, uncertainty about the global economic outlook and regulatory
concerns.
In addition to asset sales, a stock repurchase plan, such as that pursued by Unitrin
in response to American General’s unsolicited bid, may be an effective response to a
takeover threat. Buybacks at or slightly above the current market price allow
shareholders to lock in current market values. Companies may also initiate such
buybacks when they choose not to pursue other publicly announced acquisitions in order
to prevent a deterioration in the stock price and/or to reduce vulnerability to unsolicited
offers. A principal benefit of stock buybacks is that they may be quickly implemented,
typically through either a self-tender offer or an open market buyback program.
Companies can fend off a suitor by making an acquisition using either stock
consideration or issuing new debt. Acquiring a company with stock consideration has the
effect of diluting the suitor’s ownership interest if it has purchased a toehold in the target.
An acquisition can also make the cost of a transaction significantly greater. In 2008,
Anheuser-Busch considered acquiring Grupo Modelo in order to make the brewer too
large for InBev to purchase the company. More recently, Jos. A. Bank agreed to buy
retailer Eddie Bauer to make an acquisition by Men’s Warehouse more difficult.
6. Litigation Defenses
The potential merit of a litigation defense was again shown in Depomed Inc. v.
Horizon Pharma, PLC499 in 2015, when a California court preliminarily enjoined a
hostile bidder on the ground that it misused information in violation of a confidentiality
agreement, effectively ending the hostile takeover attempt, as discussed previously in
Section III.A.1. Both of these cases illustrate that a company faced with a takeover threat
should closely analyze its prior contractual dealings with the hostile acquiror and other
entities and not shy away from using courts to enforce its rights.
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7. Regulatory and Political Defenses
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VII.
Cross-Border Transactions
A. Overview
Globally, cross-border transactions fell from $1.8 trillion in 2019 to $1.2 trillion
in 2019, accounting for only 30% of overall deal volume, the lowest share in the last ten
years. The sharp decline in cross-border deal activity was caused by a number of factors,
including global trade tensions, uncertainties caused by a potential no-deal Brexit,
economic slowdowns in key markets such as Germany, greatly enhanced foreign
investment reviews and increasingly aggressive competition regulators.
With advance planning and careful attention to the greater complexity and
spectrum of issues that characterize cross-border M&A, such transactions can be
accomplished in most circumstances without falling into the pitfalls and
misunderstandings that have sometimes characterized cross-cultural business dealings. A
number of important issues should be considered in advance of any cross-border
acquisition or strategic investment, whether the target is within the United States or
elsewhere.
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1. Political and Regulatory Considerations
It is in most cases critical that the likely concerns of national and local
government agencies, employees, customers, suppliers, communities and other interested
parties be thoroughly considered and, if possible, addressed prior to any acquisition or
investment proposal becoming public. Flexibility in transaction structures, especially in
strategic or politically sensitive situations, may be helpful in particular circumstances,
such as: (i) no-governance or low-governance investments, minority positions or joint
ventures, possibly with the right to increase to greater ownership or governance over time
(though as discussed below, recently enacted legislation may decrease the utility of these
structures as tools to avoid regulatory scrutiny in the United States); (ii) when entering a
foreign market, making an acquisition in partnership with a local company or
management or in collaboration with a local source of financing or co-investor (such as a
private equity firm); or (iii) utilizing a controlled or partly controlled local acquisition
vehicle, possibly with a board of directors having a substantial number of local citizens
and a prominent local figure as a non-executive chairman. Use of preferred securities
(rather than ordinary common stock) or structured debt securities should also be
considered.
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and as a result, demand concessions. Burger King’s 2014 acquisition of Tim Hortons is
an example of how the perspective of local constituencies can influence transaction
structure. Burger King agreed to list the new company on the Toronto Stock Exchange,
reflecting the status of Tim Hortons as an iconic Canadian brand and local regulators’
desire to maintain a Canadian listing. Similarly, in its attempted hostile acquisition of
Perrigo, Mylan committed to list itself on the Tel Aviv Stock Exchange, regardless of the
outcome of its offer, in part to portray a commitment to a long-term presence in Israel
and appease Israeli securities regulators and Perrigo’s Israeli shareholders. It was also
reported that U.S.-based Praxair finally managed to agree to terms with the German
company The Linde Group for a $35 billion merger only after the parties agreed to
headquarter the combined company in a “neutral” European country (the location of
which the parties described as a key “stumbling block” to the initial talks).
In the United States, CFIUS is one of the key authorities to consider when seeking
to clear acquisitions by non-U.S. acquirors. CFIUS is a multi-agency committee that
reviews transactions for potential national security implications where non-U.S. acquirors
could obtain “control” of a U.S. business, or the transactions involve investments by non-
U.S. governments or investments in U.S. critical infrastructure or technology, or
businesses that have access to certain sensitive personal data of U.S. citizens. In recent
years, some high-profile transactions have failed due to CFIUS hurdles—including
Beijing Shiji Information Technology’s investment in StayNTouch, a hotel software
company, and Beijing Kunlun Tech’s investment in Grindr, a dating app, two
consummated transactions that President Trump ordered be unwound in March 2020 and
November 2019, respectively; Broadcom’s unsolicited takeover bid for Qualcomm,
which President Trump blocked in 2018, citing national security concerns; MoneyGram’s
and Alibaba affiliate Ant Financial’s proposed merger, which the parties terminated in
2018 following failure to gain CFIUS approval over concerns about protection of
personal data; Chinese government-backed private equity fund Canyon Bridge Capital
Partners’ proposed acquisition of Lattice Semiconductor Corporation and a Chinese
investment group’s acquisition of Aixtron SE, a German semiconductor manufacturer,
blocked by executive orders from President Trump in September 2017 and then-President
Obama in December 2016, respectively; GO Scale Capital’s acquisition of an 80.1%
interest in Philips Lumileds Holding BV, which was abandoned in January 2016; and
India-based Polaris Financial Technology’s divestiture of its 85% ownership stake in
U.S. company IdenTrust Inc., a provider of digital identification authentication services
to banks and U.S. government agencies, after a 2013 CFIUS order. CFIUS has also taken
an interest in foreign businesses already operating in the U.S. and taken action in respect
of their continued operation and ownership, as we have seen in connection with the (still
unfolding) TikTok situation.
In 2018, the United States enacted FIRRMA, the first noteworthy statutory
amendments to CFIUS’ scope and procedures in more than a decade. Certain portions of
the legislation, including the expansion of the scope of covered transactions and the
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changes to filing timelines, were effective immediately, while the U.S. Department of
Treasury issued final regulations in January 2020 to implement others, which became
effective as of February 2020. As FIRRMA is implemented, the legislation is likely to
further heighten the role of CFIUS and the need to factor into deal analysis and planning
the risks and timing of the CFIUS review process.
Among other things, FIRRMA expanded the scope of transactions that are subject
to CFIUS’ jurisdiction to include non-controlling investments by a foreign person in a
U.S. business that owns, operates, manufactures, supplies or services critical
infrastructure; produces, designs, tests, manufactures, fabricates or develops one or more
critical technologies; or maintains or collects sensitive personal data of U.S. citizens that
may be exploited in a manner that threatens national security, in each case where such
foreign person has membership, observer or nomination rights on or with respect to the
board of directors or similar decision-making body, has access to material non-public
information, or has involvement (other than through voting of shares) in substantive
decision-making of such U.S. business with respect to the use of such critical
technologies or sensitive personal data, or in the management, operation, manufacture or
supply of critical infrastructure. In addition, FIRRMA expanded the concept of critical
technologies outside of those technologies covered by export control laws, to include
emerging and foundational technologies.500
Prior to FIRRMA, a CFIUS review was only applicable when the foreign person
was acquiring “control” over a U.S. business. Transaction participants often structured
transactions so that the investor was not acquiring “control” to avoid CFIUS review. One
strategy was to acquire less than 10% of the voting securities of the U.S. business “solely
for the purpose of passive investment,” or to provide the foreign investor with certain
minority shareholder protections and negative rights that were not sufficient to render
such investor in “control” of an U.S. business entity for CFIUS purposes. With the
advent of FIRRMA and its expansion of CFIUS purview to certain non-controlling
interests, the workarounds described above may no longer be effective for certain
transactions, potentially including those in the semiconductor, cybersecurity, telecom and
advanced materials industries.
FIRRMA also updated several CFIUS procedures, including for the first time
creating a mandatory filing requirement for two types of transactions: (i) transactions in
which a foreign person would have a “substantial interest” in a U.S. business that owns or
operates critical technology or infrastructure, or has access to certain sensitive personal
data of U.S. citizens (a “substantial interest” arises when a foreign person acquires a 25%
or greater voting interest, directly or indirectly, in a U.S. business if a foreign government
in turn holds 49% or greater voting interest, directly or indirectly, in the foreign person);
and (ii) transactions in which a foreign person acquires a noncontrolling or controlling
investment in U.S. businesses that manufacture or develop critical technology in 28
enumerated industries. In addition, FIRRMA provides for mandatory filers or voluntary
filers to use an abbreviated “declaration” containing basic information in lieu of a full-
length notice. A declaration must be submitted at last 45 days before closing of the
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applicable transaction, and within 30 days of filing, CFIUS must decide whether to clear
the transaction or request submission of a full-length notice, which would commence a
full review period. FIRRMA also lengthened CFIUS’ initial review period upon the
filing of a full-length notice from 30 days to 45 days. Following the initial review,
CFIUS can open an investigation, which must be completed within another 45 days.
While FIRRMA did not change the 45-day investigation period, it allowed for
investigations to be extended for an additional 15 days in extraordinary circumstances. In
practice, this extended timeline is unlikely to have a significant effect on sensitive
transactions, as parties to such transactions are often asked to withdraw and re-file their
notice, re-starting the applicable review period.
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at a late stage of their reviews may not see COVID-19-related impacts, deals that were
filed more recently or have not yet been filed may face significant delays. In particular,
companies should anticipate a longer period of pre-filing discussions with CFIUS staff,
and some transactions could be subject to additional 45-day investigations after their
initial review phase where that would not normally be the case.
In addition to CFIUS, there are other regulatory regimes that may be implicated in
a cross-border transaction, such as President Trump’s May 2019 executive order
prohibiting dealings in information and communications technology and services in the
U.S. by a “foreign adversary,” as designated by the Department of Commerce. While the
executive order does not specifically target any country or companies, there is broad
consensus that its focus on China and its telecommunications companies, such as Huawei
and ZTE.
Besides the CFIUS filing, foreign investors have to keep in mind that the U.S.
Department of Commerce, Bureau of Economic Analysis requires certain U.S. entities
(such as investment funds or their portfolio companies) to file annual “BE 13” survey
forms with respect to foreign direct investments in the United States. In particular, a
report is required by the U.S. entity with respect to (i) a transaction creating a new
“foreign direct investment” in the United States or (ii) a transaction whereby an existing
U.S. affiliate of a foreign parent establishes a new U.S. legal entity, expands its U.S.
operations, or acquires a U.S. business enterprise. Foreign direct investment is defined as
“the ownership or control, directly or indirectly, by one foreign person of 10% or more of
the voting securities of an incorporated U.S. business enterprise, or an equivalent interest
of an unincorporated U.S. business enterprise, including a branch.” The completed form
must be submitted within 45 days of closing. The failure to report can result in civil or
criminal penalties, including fines and imprisonment.
b. Non-U.S. Regimes
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2. Integration Planning and Due Diligence
Integration planning and due diligence also warrant special attention in the cross-
border context. Wholesale application of the acquiror’s domestic due diligence standards
to the target’s jurisdiction can cause delay, wasted time and resources, or result in the
parties missing key transaction issues.
Due diligence methods must take account of the target jurisdiction’s legal regime
and local norms, including what steps a publicly traded company can take with respect to
disclosing material non-public information to potential bidders and implications for
disclosure obligations. Many due diligence requests are best funneled through legal or
financial intermediaries as opposed to being made directly to the target company. Due
diligence relating to compliance with the sanction regulations overseen by the Treasury
Department’s Office of Foreign Assets Control is essential for U.S. entities acquiring
non-U.S. businesses. Similarly, due diligence with respect to risks related to the Foreign
Corrupt Practices Act (“FCPA”)—and understanding the DOJ’s guidance for minimizing
the risk of inheriting FCPA liability—is critical for U.S. buyers acquiring a company
with non-U.S. business activities; even acquisitions of foreign companies that do business
in the United States] may be scrutinized with respect to FCPA compliance. This point is
illustrated by the DOJ’s 2019 prosecution of Technip FMC PLC, a global oil and gas
technology and services provider created by the merger of Technip S.A. and FMC
Technologies, Inc., for bribery schemes undertaken by both of its pre-merger
predecessors. In 2018, the DOJ established guidance expanding its FCPA Corporate
Enforcement Policy to M&A transactions. As a result, when an acquiring company
identifies misconduct through pre-transaction due diligence or post-transaction
integration, and then self-reports the relevant conduct, the DOJ is now more likely to
decline to prosecute if the company fully cooperates, remediates in a complete and timely
fashion and disgorges any ill-gotten gains. This presumption of declination was further
broadened by the DOJ’s 2019 revisions to the policy, which provide that an acquiring
company may still be eligible for a declination even if the target it acquired presented
aggravating circumstances – for example, if the target’s management was complicit in the
corruption, the presumption of declination could still apply if the acquirer timely
discovered and removed such members of management. This guidance further
underscores the importance of careful pre-acquisition due diligence and effective post-
closing compliance integration, which will place acquiring companies in the best position
to take advantage of the DOJ’s enforcement approach in appropriate cases where
misconduct is uncovered.
Like the U.S., the EU also has a pre-merger notification regime. Transactions
involving companies with operations across multiple EU member states must be
submitted to the European Commission for approval, while mergers involving smaller
companies, or companies with a more limited geographic footprint, may not be reportable
at the EU level and may instead trigger antitrust reviews in multiple EU countries. The
EU review process typically involves extensive pre-notification discussions between the
European Commission and the parties, which can significantly delay the submission of
the formal notification. Even after submission of the formal filing, the timing of the
review can be unpredictable, as regulators have the ability to stop the clock in connection
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with requests for additional information. In recent years, the European Commission has
become increasingly strict in its M&A antitrust enforcement, blocking three mergers in
2019 (versus an average of less than one per year in the prior ten years) and requiring
extensive remedial actions.
Under the current transition agreement between the EU and the UK, all EU-
reportable deals are exempt from the jurisdiction of the UK’s Competition and Markets
Authority (the “CMA”) until the end of 2020. Starting in January 2021, the CMA will
have jurisdiction to review and challenge deals that are also subject to review in the EU,
adding an additional hurdle and potential delay for transactions involving parties with
operations both in the UK and the EU. For decades the CMA has not reviewed large
global transactions because the European Commission’s review typically took
jurisdiction away from the CMA. However, in preparation for a more active role
following Brexit, the CMA has substantially increased its staffing, and its newly-
energized status includes broad powers to mandate interim relief with global effect while
it reviews a transaction, without any judicial or other process.
China also has a robust pre-merger notification system and has been active in its
review and enforcement activities. In 2018, MOFCOM was succeeded by and is now
known as the State Administration for Market Regulation (“SAMR”). SAMR has
granted conditional approval subject to the fulfillment of certain conditions in several
major cross-border transactions, including Bayer’s acquisition of Monsanto (conditioned
on the divestiture of certain parts of Bayer’s business and commitments with respect to
digital agricultural products and services in China), Dow Chemical’s 2017 merger with
DuPont (conditioned on the divestiture of certain parts of each party’s business, supply
and distribution commitments in China) and AB InBev’s 2016 acquisition of SABMiller
(conditioned on the divestiture of SABMiller’s 49% equity stake in a Chinese joint
venture).
China’s antitrust laws require that SAMR review any acquisition where aggregate
global sales of all parties exceed Rmb10 billion and sales in China for each of at least two
parties exceed Rmb400 million. This low threshold for Chinese sales puts many U.S. or
European deals squarely within SAMR’s jurisdiction. China’s laws also give SAMR
broad latitude in selecting remedies and the timing of review. The review clock in China
only starts ticking after SAMR accepts the filing, which can take weeks or months at
SAMR’s discretion. The review process itself can take longer than most jurisdictions and
be unpredictable – while under the statute SAMR has 90 days after its initial acceptance
of the filing to complete its review, which can be extended for a further 60 days, the
review typically takes much longer, with the parties often withdrawing and resubmitting
the notification to give SAMR more time to complete its review. For example, FedEx’s
acquisition of TNT Express received clearance from U.S., EU and Brazilian regulatory
authorities by early February 2016, but did not receive clearance from SAMR until the
end of April 2016, and Qualcomm’s $44 billion acquisition of NXP received clearance
from antitrust regulators in eight jurisdictions, including the U.S., EU, Taiwan and Korea,
by January 2018, but in the midst of intensifying trade tensions between the United States
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and China, never obtained SAMR clearance and was therefore terminated in July 2018.
However, certain transactions with limited horizontal or vertical market overlap, or where
the acquisition target (or joint venture, as applicable) does not engage in economic
activities in China, may be eligible for SAMR’s simplified merger review procedure.
This typically reduces the formal review period after SAMR’s initial acceptance of the
filing to approximately 30 calendar days on average.
Additionally, India’s merger control regime, which came into force in 2011 with
the creation of the Competition Commission of India (“CCI”), is now in full swing. An
extensive amount of information about the parties and the transaction is required to be
included in the notification, and India is one of very few jurisdictions that requires
notification to be filed within 30 days of either the board(s) of directors’ approval of the
combination or the execution of any binding documents related to the combination. The
CCI has 30 to 210 days from the date of filing to issue a decision, but the clock stops
whenever the CCI issues a request for supplemental information. Parties should expect at
least one or two supplemental requests for information to stop the clock. Consequently,
the review period will generally be at least two to three months and depending upon the
complexity of the matter can be longer.
In the first quarter of 2020, antitrust and competition authorities around the world
have responded to the COVID-19 pandemic, primarily by moving to remote work and
adopting temporary arrangements to ensure that they can continue to carry out their
enforcement mandates despite the difficult circumstances caused by the pandemic. Some
jurisdictions, notably the European Union, are encouraging or requiring merging parties
to delay formal notifications, while others have suspended statutory deadlines until
further notice. While foreign antitrust authorities remain committed to protecting and
promoting competition, they have signaled that merger parties should anticipate delays in
the review process.
Understanding the custom and practice of M&A in the target’s local jurisdiction is
essential. Successful execution is more art than science, and will benefit from early
involvement by experienced local advisors. For example, understanding when to
respect—and when to challenge—a target’s sale “process” may be critical. Knowing
how and at what price level to enter the discussions will often determine the success or
failure of a proposal. In some situations, it is prudent to start with an offer on the low
side, while in other situations, offering a full price at the outset may be essential to
achieving a negotiated deal and discouraging competitors, including those who might
raise political or regulatory issues. In strategically or politically sensitive transactions,
hostile maneuvers may be imprudent; in other cases, unsolicited pressure may be the only
way to force a transaction. Similarly, understanding in advance the roles of arbitrageurs,
hedge funds, institutional investors, private equity funds, proxy voting advisors and other
important market players in the target’s market—and their likely views of the anticipated
acquisition attempt as well as when they appear and disappear from the scene—can be
pivotal to the outcome of the contemplated transaction.
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Where the target is a U.S. public company, the customs and formalities
surrounding board of director participation in the M&A process, including the
participation of legal and financial advisors, the provision of customary fairness opinions,
and the inquiry and analysis surrounding the activities of the board and the financial
advisors, can be unfamiliar and potentially confusing to non-U.S. transaction participants
and can lead to misunderstandings that threaten to upset delicate transaction negotiations.
Non-U.S. participants need to be well-advised as to the role of U.S. public company
boards and the legal, regulatory and litigation framework and risks that can constrain or
prescribe board action. In particular, the litigation framework should be kept in mind as
shareholder litigation often accompanies M&A transactions involving U.S. public
companies. The acquiror, its directors, shareholders and offshore reporters and regulators
should be conditioned in advance (to the extent possible) to expect litigation and not to
necessarily view it as a sign of trouble. In addition, it is important to understand that the
U.S. discovery process in litigation is different, and in some contexts more intrusive, than
the process in other jurisdictions. Moreover, the choice of governing law and the choice
of forum to govern any potential dispute between the parties about the terms or
enforceability of the agreement may have a substantial effect on the outcome of any such
dispute, or even be outcome determinative. Parties entering into cross-border
transactions should consider with care whether to specify the remedies available for
breach of the transaction documents and the mechanisms for obtaining or resisting such
remedies.
The litigation risk and the other factors mentioned above can impact both tactics
and timing of M&A processes and the nature of communications with the target
company. Additionally, local takeover regulations often differ from those in the
acquiror’s home jurisdiction. For example, the mandatory offer concept common in
Europe, India and other countries—in which an acquisition of a certain percentage of
securities requires the bidder to make an offer for either the balance of the outstanding
shares or for an additional percentage—is very different from U.S. practice, as is a
regulator-supervised auction of the type the U.K. Takeover Panel imposed as Comcast
and 21st Century Fox competed to acquire Sky PLC. Permissible deal-protection
structures, pricing requirements and defensive measures available to targets also differ.
Sensitivity also must be given to the contours of the target board’s fiduciary duties and
decision-making obligations in home jurisdictions, particularly with respect to
consideration of stakeholder interests other than those of shareholders and nonfinancial
criteria.
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The multifaceted overlay of foreign takeover laws and the legal and tactical
considerations they present can be particularly complex when a bid for a non-U.S.
company may be unwelcome. Careful planning and coordination with foreign counsel
are critical in hostile and unsolicited transactions, on both the bidder and target sides. For
example, Italy’s “passivity” rule that limits defensive measures a target can take without
shareholder approval is suspended unless the hostile bidder is itself subject to equivalent
rules. A French company’s organizational documents can provide for a similar rule, and
as of March 31, 2016, France’s Florange Act made it the default that a French company’s
long-term shareholders are granted double voting rights, which would reduce the
influence of toehold acquisitions or merger arbitrageurs. Dutch law and practice allow
for the target’s use of an independent “foundation,” or stichting, to at least temporarily
defend against hostile offers through the issuance of voting shares. The foundation,
which is controlled by independent directors appointed by the target and has a broad
defensive mandate, is issued high-vote preferred shares at a nominal cost, which allow it
to control the voting outcome of any matter put to target shareholders. The three-way
battle among Mylan, Perrigo and Teva in 2015 illustrated such a takeover defense.
Mylan (which had inverted from Pennsylvania to the Netherlands) used a potent
combination of takeover defenses facilitated by Dutch law, including the use of a
stichting which was issued up to 50% of Mylan’s voting shares, and Mylan’s own
governance documents, to take a resist-at-all-costs approach to Teva’s bid, even as it
pursued its own hostile offer against Perrigo, which had no similar defenses as an Irish-
domiciled company.
Disclosure obligations may also vary across jurisdictions. How and when an
acquiror’s interest in the target is publicly disclosed should be carefully controlled to the
extent possible, keeping in mind the various ownership thresholds or other triggers for
mandatory disclosure under the law of the jurisdiction of the company being acquired.
Treatment of derivative securities and other pecuniary interests in a target other than
equity holdings also vary by jurisdiction and have received heightened regulatory focus
in recent periods.
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collateral (although there are some important limitations on using stock of U.S. targets as
collateral).
Significantly, neither Tier I nor Tier II exemptive relief limits the potential
exposure of non-U.S. issuers—in nearly all cases already subject to regulation in their
home jurisdiction—to liability under the antifraud, anti-manipulation and civil liability
provisions of the U.S. federal securities laws in connection with transactions with U.S.
entanglements. Both this risk and a desire to avoid the demands of U.S. regulation have
persuaded many international issuers and bidders to avoid U.S. markets and exclude U.S.
investors from significant corporate transactions. Notably, the exclusionary techniques
that have developed for avoiding applicability of U.S. securities regulation are often
simply not available to non-U.S. purchasers who buy shares through, for example, open
market purchases. It may be impossible when transacting on non-U.S. exchanges to
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exclude U.S. sellers, and, hence, this inability to exclude U.S. sellers may render
problematic any attempts to structure around U.S. laws. As was seen in the
Endesa/E.ON/Acciona matter in which E.ON, a German bidder for Endesa, a Spanish
utility, sued Acconia, a Spanish corporation that had acquired shares of Endesa to
become a “key” stockholder under Spanish law, in the Southern District of New York,
such uncertainty—and the potential for ensuing litigation—can be exploited to gain
tactical advantage in a takeover battle.
Transaction structure may affect the ability to achieve synergies, influence actual
or perceived deal certainty and influence market perception. Structures should facilitate,
rather than hinder, efforts to combine the operations of the two companies so as to
achieve greater synergies, promote unified management and realize economies of scale.
The importance of simplicity in a deal structure should not be underestimated—simple
deal structures are more easily understood by market players and can facilitate the
ultimate success of a transaction.
One of the core challenges of cross-border deals using acquiror stock is the
potential “flowback” of liquidity in the acquiror’s stock to the acquiror’s home market.
This exodus of shares, prompted by factors ranging from shareholder taxation (e.g.,
withholding taxes or loss of imputation credits), index inclusion of the issuer or target
equity, available liquidity in the newly issued shares and shareholder discomfort with
non-local securities, to legal or contractual requirements that certain institutional
investors not hold shares issued by a non-local entity or listed on a non-local exchange,
can put pressure on the acquiror’s stock price. It may also threaten exemptions from
registration requirements that apply to offerings outside the home country of the acquiror.
United States and foreign tax issues will, of course, also influence deal structure.
In structuring a cross-border deal, the parties will attempt to maximize tax efficiency
from a transactional and ongoing perspective, both at the entity and at the shareholder
level. In transactions involving a significant equity component, careful consideration
may need to be given to whether the combined group should be U.S. or foreign parented.
Although U.S. tax legislation enacted in 2017 has adopted certain features of a
“territorial” tax regime, it will be critical to carefully analyze and quantify the costs of
subjecting the combined group to U.S. tax rules by virtue of being U.S. parented,
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including the new minimum tax on earnings of non-U.S. subsidiaries. Importantly, the
2017 legislation did not change the U.S. tax rules generally applicable to mergers and
acquisitions and also left in place rules applicable to “inversion” transactions. In fact, the
law contains harsh additional rules intended to deter inversions. Rather than simplifying
corporate taxation, U.S. tax “reform” thus has further exacerbated the complexity of U.S.
tax rules applicable to multinational groups.
1. All-Cash
All-cash transactions are easy for all constituencies to understand and do not
present flowback concerns. The cash used in the transaction frequently must be financed
through equity or debt issuances that will require careful coordination with the M&A
transaction. Where cash constitutes all or part of the acquisition currency, appropriate
currency hedging should be considered, given the time necessary to complete a cross-
border transaction. Careful planning and consideration should be given to any hedging
requirements, which can be expensive and, if they need to be implemented before the
announcement of a deal, may create a leak. In addition, parties should be cognizant of
financial assistance rules in certain non-U.S. jurisdictions that may limit the ability to use
debt financing for an acquisition, as well as tax rules limiting the deductibility of interest
expense.
2. Equity Consideration
United States securities and corporate governance rules can be problematic for
non-U.S. acquirors who will be issuing securities that will become publicly traded in the
U.S. as a result of an acquisition. SEC rules, the Sarbanes-Oxley and Dodd-Frank Acts
and stock exchange requirements should be evaluated to ensure compatibility with home
country rules and to be certain that the non-U.S. acquiror will be able to comply. Rules
relating to director independence, internal control reports, and loans to officers and
directors, among others, can frequently raise issues for non-U.S. companies listing in the
United States. Structures involving the issuance of non-voting stock or other special
securities of a non-U.S. acquiror may serve to mitigate some of the issues raised by U.S.
corporate governance concerns. Similar considerations must be addressed for U.S.
acquirors seeking to acquire non-U.S. targets. Governance practices can also be relevant
when equity consideration is used in a hostile acquisition. For example, in Mylan’s
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hostile cash and stock offer for Perrigo, Mylan’s shareholder-unfriendly governance
regime, which was permissible in the Netherlands, was a sticking point for many Perrigo
investors, and was a significant driver in Mylan’s inability to generate sufficient support
for its offer among Perrigo shareholders.
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TABLE OF AUTHORITIES
-169-
Amirsaleh v. Bd. of Trade of New York, Inc.,
C.A. No. 2822-CC, 2009 WL 3756700 (Del. Ch. Nov. 9, 2009) ......................196 n.31
Appel v. Berkman,
180 A.3d 1055 (Del. 2018) ........................................................................50, 210 n.223
Aronson v. Lewis,
473 A.2d 805 (Del. 1984) ..................................................................194 n.24, 196 n.37
BlackRock Credit Allocation Income Tr. v. Saba Cap. Master Fund, Ltd.
224 A.3d 964 (Del. 2020) ................................................................................226 n.441
-170-
Blueblade Cap. Opportunities LLC v. Norcraft Cos.,
C.A. No. 11184-VCS, 2018 WL 3602940
(Del. Ch. July 27, 2018) ................................................................... 112, 222 nn.388-89
C&J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation
Emps.’ Ret. Tr.,
107 A.3d 1049 (Del. 2014) .................................................................................. passim
-171-
Chester Cnty. Emps.’ Ret. Fund v. KCG Holdings, Inc.,
C.A. No. 2017-0421-KSJM, 2019 WL 2564093 (Del. Ch. June 21,
2019) ..........................................................................................................50, 210 n.225
Collins v. Santoro,
No. 154140/2014, 2014 WL 5872604 (N.Y. Sup. Ct. Nov. 10, 2014) ............227 n.454
Cumming v. Edens,
C.A. No. 13007-VCS, 2018 WL 992877 (Del. Ch. Feb. 20, 2018)... 43, 206 nn.169-70
-172-
Desert Partners, L.P. v. USG Corp.,
686 F. Supp. 1289 (N.D. Ill. 1988) ..................................................................225 n.427
English v. Narang,
C.A. No. 2018-0221-AGB, 2019 WL 1300855 (Del. Ch. Mar. 20,
2019) ..............................................................................................215 n.307, 216 n.319
-173-
Frontier Oil Corp. v. Holly Corp.,
C.A. No. 20502, 2005 WL 1039027 (Del. Ch. Apr. 29, 2005)........................220 n.373
Gantler v. Stephens,
965 A.2d 695 (Del. 2009) ................................................................197 n.54, 208 n.209
Grimes v. Donald,
673 A.2d 1207 (Del. 1996) ..............................................................................228 n.462
-174-
H.F. Ahmanson & Co. v. Great W. Fin. Corp.,
C.A. No. 15650, 1997 WL 305824 (Del. Ch. June 3, 1997) ...........................219 n.359
Holstein v. Armstrong,
751 F. Supp. 746 (N.D. Ill. 1990) ....................................................................231 n.486
-175-
In re Bear Stearns Litig.,
870 N.Y.S.2d 709 (Sup. Ct. 2008) ...................................................................222 n.391
-176-
In re Cyan, Inc. S’holders Litig.,
C.A. No. 11027-CB, 2017 WL 1956955 (Del. Ch. May 11, 2017) .................216 n.317
-177-
In re Goldman Sachs Grp., Inc. S’holder Litig.,
C.A. No. 5215-VCG, 2011 WL 4826104 (Del. Ch. Oct. 12, 2011) ..................196 n.35
In re Illumina, Inc.,
No. 9387 (F.T.C. Dec. 17, 2019) .......................................................................194 n.16
-178-
In re MCI Worldcom, Inc. Sec. Litig.,
93 F. Supp.2d 276 (E.D.N.Y. 2000) ................................................................230 n.484
-180-
In re Tele-Commc’ns, Inc. S’holders Litig.,
C.A. No. 16470, 2005 WL 3642727 (Del. Ch. Dec. 21, 2005,
revised Jan. 10, 2006) .......................................................................................... passim
-181-
In re Xerox Corp. Consol. S’holder Litig.,
76 N.Y.S.3d 759 (Sup. Ct. 2018),
rev’d on other grounds sub nom. Deason v. Fujifilm Holdings Corp.,
86 N.Y.S.3d 28 (1st Dep’t 2018) .....................................................................226 n.440
-182-
Kidsco Inc. v. Dinsmore,
674 A.2d 483 (Del. Ch.), aff’d, 670 A.2d 1338 (Del. 1995) ............................227 n.448
Larkin v. Shah,
C.A. No. 10918-VCS, 2016 WL 4485447 (Del. Ch. Aug. 25, 2016) .................. passim
Lavin v. W. Corp.,
C.A. No. 2017-0547-JRS, 2017 WL 6728702
(Del. Ch. Dec. 29, 2017) ..............................................................10, 193 n.9, 210 n.232
-183-
Maric Cap. Master Fund, Ltd. v. PLATO Learning, Inc.,
11 A.3d 1175 (Del. Ch. 2010)..........................................................................215 n.310
McMullin v. Beran,
765 A.2d 910 (Del. 2000) ..........................................................................45, 207 n.185
Mizel v. Connelly,
C.A. No. 16638, 1999 WL 550369 (Del. Ch. Aug. 2, 1999) ...........................206 n.165
Monty v. Leis,
123 Cal. Rptr. 3d 641 (Ct. App. 2011).............................................................221 n.379
Morrison v. Berry,
191 A.3d 268 (Del. 2018) ......................................49, 209 n.216, 209 n.221, 210 n.222
-184-
N.J. Carpenters Pension Fund v. infoGROUP, Inc.,
C.A. No. 5334-VCN, 2011 WL 4825888 (Del. Ch. Oct. 6, 2011) ..................202 n.115
Nguyen v. Barrett,
C.A. No. 11511-VCG, 2016 WL 5404095 (Del. Ch. Sept. 28, 2016) .............209 n.219
North v. McNamara,
47 F. Supp. 3d 635 (S.D. Ohio 2014) ..............................................................227 n.454
Olenik v. Lodzinski,
208 A.3d 704 (Del. 2019) .................................................................. 52, 211 nn.239-40
Orman v. Cullman,
794 A.2d 5 (Del. Ch. 2002)........................................................................110, 196 n.40
Orman v. Cullman,
C.A. No. 18039, 2004 WL 2348395
(Del. Ch. Oct. 20, 2004).................................................................205 n.162, 221 n.380
Pell v. Kill,
135 A.3d 764 (Del. Ch. 2016)..........................................................................202 n.110
-185-
PharmAthene, Inc. v. SIGA Techs., Inc.,
C.A. No. 2627-VCP, 2010 WL 4813553 (Del. Ch. Nov. 23, 2010) ................212 n.254
Salzberg v. Sciabacucchi,
227 A.3d 102 (Del. 2020) ................................................................................228 n.456
San Antonio Fire & Police Pension Fund v. Amylin Pharm., Inc.,
983 A.2d 304 (Del. Ch. 2009),
aff’d, 981 A.2d 1173 (Del. 2009)..................................................... 138, 228 nn.463-65
-186-
Sandys v. Pincus,
152 A.3d 124 (Del. 2016) .................................................................................... passim
Singh v. Attenborough,
137 A.3d 151 (Del. 2016) .................................................................................... passim
Solak v. Sarowitz,
C.A. No. 12299-CB, 2016 WL 7468070 (Del. Ch. Dec. 27, 2016) .................228 n.460
Solomon v. Armstrong,
747 A.2d 1098 (Del. Ch. 1999), aff’d, 746 A.2d 277 (Del. 2000) ...................203 n.124
-187-
Steinhardt v. Howard-Anderson,
C.A. No. 5878-VCL (Del. Ch. Jan. 24, 2011) .................................197 n.57, 213 n.282
Stroud v. Grace,
606 A.2d 75 (Del. 1992) ..................................................................................202 n.110
Tornetta v. Musk,
C.A. No. 2018-0408-JRS, 2019 WL 4566943
(Del. Ch. Sept. 20, 2019) ...........................................................................52, 211 n.249
Vento v. Curry,
C.A. No. 2017-0157-AGB, 2017 WL 1076725
(Del. Ch. Mar. 22, 2017) ..................................................................................215 n.305
-188-
Williams Cos. v. Energy Transfer Equity,
159 A.3d 264 (Del. 2017) ................................................................................224 n.418
Williams v. Geier,
671 A.2d 1368 (Del. 1996) ................................................................................200 n.96
Statutes
Other Authorities
17 C.F.R. § 229.303
Management's Discussion & Analysis of Financial Condition &
Results of Operations .......................................................................................230 n.479
17 C.F.R. § 240.13e-3
Going Private Transactions by Certain Issues or Their Affiliates .............84, 217 n.334
-189-
17 C.F.R. § 240.14d-101
Schedule 14D-9 ................................................................................................232 n.496
17 C.F.R. § 240.14e-1
Unlawful Tender Offer Practices .....................................................................217 n.326
17 C.F.R. § 240.14e-3
Transactions in Securities on the Basis of Material, Nonpublic
Information in the Context of Tender Offers ...................................................230 n.479
In re Illumina, Inc.,
FTC Dkt. No. 9387 (Dec. 17, 2019). .................................................................194 n.16
John S. McCain National Defense Authorization Act for Fiscal Year 2019,
H.R. 5515, 115th Cong. (2018).........................................................................232 n.500
J. Travis Laster, Revlon Is a Standard of Review: Why It’s True and What
It Means, 19 FORDHAM J. CORP. & FIN. L. 5 (2013) ..........................................196 n.34
-190-
Martin Lipton, International Business Council of the World Economic
Forum, The New Paradigm: A Roadmap for an Implicit Corporate
Governance Partnership between Corporations and Investors to
Achieve Sustainable Long-Term Investment and Growth (2016) ......................194 n.14
Nasdaq Stock Market Rules, Rule IM 5250-1 .....................................230 n.482, 231 n.491
Leo E. Strine, Jr., Documenting the Deal: How Quality Control and
Candor Can Improve Boardroom Decision-Making and Reduce the
Litigation Target Zone, 70 BUS. LAW. (May 2015) ........................................213 n. 276
-191-
Ryan Thomas & Russell Stair, Revisiting Consolidated Edison—A Second
Look at the Case That Has Many Questioning Traditional Assumptions
Regarding the Availability of Shareholder Damages in Public
Company Mergers, 64 BUS. LAW. 329, 349-57 (2009) ....................................224 n.420
Wachtell, Lipton, Rosen & Katz, Comment Letter to SEC (July 24, 2008) ..........232 n.501
Aaron M. Zeid, Esq., Market Conditions January 2019 – Representations
and Warranties Insurance, GALLAGHER (Jan. 2019).......................................216 n.322
-192-
Takeover Law and Practice Endnotes
1
Stefan Boettrich and Svetlana Starykh, Recent Trends in Securities Class Action
Litigation: 2019 Full-Year Review at 2 (2020), available at
https://www.nera.com/content/dam/nera/publications/2020/PUB_Year_End_Trends_012
120_Final.pdf [hereinafter “2019 NERA Report”]; Stefan Boettrich and Svetlana
Starykh, Recent Trends in Securities Class Action Litigation: 2018 Full-Year Review at 2
(2019), available at
http://www.nera.com/content/dam/nera/publications/2019/PUB_Year_End_Trends_0128
19_Final.pdf [hereinafter “2018 NERA Report”]; Cornerstone Research, Securities Class
Action Filings: 2019 Year in Review at 1 (2020), available at
https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2019-
Year-in-Review [hereinafter “Cornerstone Report”].
2
2019 NERA Report at 4; Cornerstone Report at 5.
3
See, e.g., Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd., 177 A.3d
1 (Del. 2017); DFC Glob. Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del.
2017).
4
Cornerstone Research, Appraisal Litigation in Delaware: Trends in Petitions and
Opinions at 1, available at https://www.cornerstone.com/publications/reports/appraisal-
litigation-delaware-2006-2018.
5
KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738, 756 (Del. 2019).
6
Id. at 742.
7
Schnatter v. Papa John’s Int’l, Inc., C.A. No. 2018-0542-AGB, 2019 WL
194634, at *16 (Del. Ch. Jan. 15, 2019).
8
Leb. Cty. Emps.’ Ret. Fund v. AmerisourceBergen Corp., C.A. No. 2019-0527-
JTL, 2020 WL 132752, at *27 (Del. Ch. Jan. 13, 2020).
9
Lavin v. W. Corp., C.A. No. 2017-0547-JRS, 2017 WL 6728702 (Del. Ch. Dec.
29, 2017).
10
High River Ltd. P’ship v. Occidental Petroleum Corp., C.A. No. 2019-0403-JRS,
2019 WL 6040285 (Del. Ch. Nov. 14, 2019).
11
Id. at *1.
12
Id. at *5.
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13
Id. at *7-8.
14
Martin Lipton, International Business Council of the World Economic Forum,
The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership
between Corporations and Investors to Achieve Sustainable Long-Term Investment and
Growth (2016), available at
https://www.wlrk.com/webdocs/wlrknew/AttorneyPubs/WLRK.25960.16.pdf.
15
Press Release, DEP’T OF JUSTICE, Justice Department Sues to Block Sabre’s
cquisition of Farelogix (Aug. 20, 2019), available at
https://www.justice.gov/opa/pr/justice-department-sues-block-sabres-acquisition-
farelogix.
16
Complaint, In re Illumina, Inc., Dkt. No. 9387 (Dec, 17, 2019), available at
https://www.ftc.gov/system/files/documents/cases/d9387_illumina_pacbio_administrativ
e_part_3_complaint_public.pdf.
17
Bryan Koenig, ‘No Relaxation’ Under COVID-19, FTC Antitrust Chief Says,
LAW360 (Apr. 20, 2020), available at https://www.law360.com/articles/1265571/-no-
relaxation-under-covid-19-ftc-antitrust-chief-says.
18
DEP’T OF JUSTICE & FED. TRADE COMM’N, Horizontal Merger Guidelines (Aug.
19, 2019), available at https://www.justice.gov/atr/horizontal-merger-guidelines-
08192010.
19
Id.
20
Press Release, DEP’T OF JUSTICE, Justice Department Requires Divestitures as
Dean Foods Sells Fluid Milk Processing Plants to DFA out of Bankruptcy (May 1, 2020),
available at https://www.justice.gov/opa/pr/justice-department-requires-divestitures-
dean-foods-sells-fluid-milk-processing-plants-dfa.
21
See Paramount Commc’ns, Inc. v. Time Inc. (Time-Warner), 571 A.2d 1140,
1142, 1150, 1151 (Del. 1990).
22
RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816, 865 n.191 (Del. 2015).
23
DEL. CODE ANN. tit. 8, § 141(e) (West 2015).
24
Smith v. Van Gorkom (Trans Union), 488 A.2d 858, 874 (Del. 1985) (holding that
in the context of a proposed merger, directors must inform themselves of all “information
. . . reasonably available to [them] and relevant to their decision” to recommend the
merger); see also Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (“[U]nder the
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business judgment rule director liability is predicated upon concepts of gross
negligence.”).
25
Under Del. Code Ann. tit. 8, section 102(b)(7), a Delaware corporation may in its
certificate of incorporation either limit or eliminate entirely the personal liability of a
director to the corporation or its shareholders for monetary damages for breach of
fiduciary duty, but such provisions may not eliminate or limit the liability of a director
for, among other things, (1) breach of the director’s duty of loyalty to the corporation or
its shareholders or (2) acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law. Many Delaware corporations have either
eliminated or limited director liability to the extent permitted by law. The Delaware
Supreme Court has ruled that the typical Delaware corporation charter provision
exculpating directors from monetary damages in certain cases applies to claims relating
to disclosure issues in general and protects directors from monetary liability for good
faith omissions. See Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270 (Del. 1994).
Similar provisions have been adopted in most states. The limitation on personal liability
does not affect the availability of injunctive relief.
26
See, e.g., Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1341 (Del.
1987); In re PNB Holding Co. S’holders Litig., C.A. No. 28-N, 2006 WL 2403999 (Del.
Ch. Aug. 18, 2006) (reviewing under the entire fairness standard a transaction in which
most public shareholders were cashed out but some shareholders, including the directors,
continued as shareholders of the recapitalized company); Blasius Indus., Inc. v. Atlas
Corp., 564 A.2d 651 (Del. Ch. 1988) (holding that actions by the board after a consent
solicitation had begun that were designed to thwart the dissident shareholder’s goal of
obtaining majority representation on the board, violated the board’s fiduciary duty); AC
Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 111 (Del. Ch. 1986)
(“[W]here a self-interested corporate fiduciary has set the terms of a transaction and
caused its effectuation, it will be required to establish the entire fairness of the transaction
to a reviewing court’s satisfaction.”).
27
See Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939); see also Broz v. Cellular Info.
Sys., Inc., 673 A.2d 148, 155 (Del. 1996) (stating that a director “may not take a business
opportunity for his own if: (1) the corporation is financially able to exploit the
opportunity; (2) the opportunity is within the corporation’s line of business; (3) the
corporation has an interest or expectancy in the opportunity; and (4) by taking the
opportunity for his own, the [director] will thereby be placed in a position inimicable to
his duties to the corporation” but that a director “may take a corporate opportunity if:
(1) the opportunity is presented to the director . . . in his individual and not his corporate
capacity; (2) the opportunity is not essential to the corporation; (3) the corporation holds
no interest or expectancy in the opportunity; and (4) the director or officer has not
-195-
wrongfully employed the resources of the corporation in pursuing or exploiting the
opportunity”).
28
Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006).
29
Id.
30
In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006).
31
See Amirsaleh v. Bd. of Trade of City of New York, Inc., C.A. No. 2822-CC, 2009
WL 3756700, at *5 (Del. Ch. Nov. 9, 2009); Liberty Prop. L.P. v. 25 Mass. Ave. Prop.
LLC, C.A. No. 3027-VCS, 2009 WL 224904, at *5 & n.21 (Del. Ch. Jan. 22, 2009), aff’d
sub nom. 25 Mass. Ave. Prop. LLC v. Liberty Prop. Ltd. P’ship, 970 A.2d 258 (Del.
2009).
32
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 244 (Del. 2009).
33
In re Cornerstone Therapeutics Inc. Stockholder Litig., 115 A.3d 1173 (Del.
2015).
34
J. Travis Laster, Revlon Is a Standard of Review: Why It’s True and What It
Means, 19 FORDHAM J. CORP. & FIN. L. 5, 26-27 (2013) (discussing the distinction
between standards of conduct and standards of review).
35
In re Goldman Sachs Grp., Inc. S’holder Litig., C.A. No. 5215-VCG, 2011 WL
4826104, at *23 (Del. Ch. Oct. 12, 2011) (quoting In re Citigroup Inc. S’holder
Derivative Litig., 964 A.2d 106, 139 (Del. Ch. 2009)).
36
DEL. CODE ANN. tit. 8, § 141(a) (West 2011).
37
See, e.g., Aronson v. Lewis, 473 A.2d 805, 812-13 & n.6 (Del. 1984).
38
Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1373 (Del. 1995) (quoting
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985)).
39
In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 615 (Del. Ch. 2005).
40
E.g., Orman v. Cullman, 794 A.2d 5, 20 (Del. Ch. 2002).
41
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
42
Unocal, 493 A.2d 946.
43
Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011).
-196-
44
RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816, 857 (Del. 2015).
45
Corwin v. KKR Fin. Holdings, LLC, 125 A.3d 304, 312 (Del. 2015).
46
See, e.g., id. at 308-14; but cf. id. at 311 n.20 (declining to rule on the continued
vitality of In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 68 (Del. 1995), in
which the court did not apply the business judgment rule to the Santa Fe board’s decision
to adopt defensive measures to ward off a hostile approach from Union Pacific, on the
ground that “the stockholders of Santa Fe merely voted in favor of the merger [with
Burlington] and not the defensive measures”).
47
On a motion for preliminary injunction, Vice Chancellor Parsons “conclude[d]
that Plaintiffs are likely to succeed on their argument that the approximately 50% cash
and 50% stock consideration here triggers Revlon.” In re Smurfit-Stone Container Corp.
S’holder Litig., C.A. No. 6164-VCP, 2011 WL 2028076, at *16 (Del. Ch. May 24, 2011).
48
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del.
1986).
49
Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989).
50
Paramount Commc’ns Inc. v. QVC Network Inc. (QVC), 637 A.2d 34, 45 (Del.
1994).
51
C & J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret.
Tr., 107 A.3d 1049, 1053 (Del. 2014).
52
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 242 (Del. 2009).
53
Id.
54
See Gantler v. Stephens, 965 A.2d 695 (Del. 2009) (Unocal review not required
where the plaintiff challenged the board’s decision to reject the offers of three suitors and
pursue a recapitalization instead); TW Servs., Inc. v. SWT Acquisition Corp., C.A. Nos.
10427, 10298, 1989 WL 20290 (Del. Ch. Mar. 2, 1989) (Revlon not triggered by an
unsolicited offer to negotiate a friendly deal).
55
Paramount Commc’ns, Inc. v. Time Inc. (Time-Warner), 571 A.2d 1140 (Del.
1990).
56
QVC, 637 A.2d 34.
57
Tr. of Ruling of the Ct. on Pls.’ Mot. For a Prelim. Inj. at 6-7, Steinhardt v.
Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 24, 2011) (“[I]t’s just not worth
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having the dance on the head of a pin as to whether it’s 49 percent cash or 51 percent
cash or where the line is. This is the only chance that Occam stockholders have to extract
a premium, both in the sense of maximizing cash now, and in the sense of maximizing
their relative share of the future entity’s control premium. This is it. So I think it makes
complete sense that you would apply a reasonableness review, enhanced scrutiny to this
type of transaction.”).
58
See Time-Warner, 571 A.2d at 1154; accord In re Santa Fe Pac. Corp. S’holder
Litig., C.A. No. 13587, 1995 WL 334258, at *8 (Del. Ch. May 31, 1995) (holding that
although a “bidding contest” did occur, Revlon duties not triggered where board did not
initiate bidding and sought strategic stock-for-stock merger), aff’d in part, rev’d in part,
669 A.2d 59 (Del. 1995).
59
Time-Warner, 571 A.2d at 1150; see also id. at 1154 (“The fiduciary duty to
manage a corporate enterprise includes the selection of a time frame for achievement of
corporate goals.”); accord Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1289-
90 (Del. 1994).
60
Transactions in which a controller cashes or squeezes out the minority are often
subject to entire fairness review, discussed infra Section II.C.
61
In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1047-48 (Del. Ch. 2012); In re
NCS Healthcare, Inc., S’holders Litig., 825 A.2d 240, 254-55 (Del. Ch. 2002) (“The
situation presented on this motion does not involve a change-of-control. On the contrary,
this case can be seen as the obverse of a typical Revlon case. Before the transaction . . . is
completed, [the seller] remains controlled by the [controlling stockholder]. The record
shows that, as a result of the proposed [] merger, [the seller’s] stockholders will become
stockholders in a company that has no controlling stockholder or group. Instead, they
will be stockholders in a company subject to an open and fluid market for control.”),
rev’d on other grounds sub nom. Omni Care, Inc. v. NCS Healthcare, Inc., 822 A.2d 397
(Del. 2002).
62
In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59 (Del. 1995).
63
In re Smurfit-Stone Container Corp. S’holder Litig., C.A. No. 6164-VCP, 2011
WL 2028076, at *15 (Del. Ch. May 24, 2011).
64
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 241 (Del. 2009).
65
In re Rural Metro Corp. Stockholders Litig., 88 A.3d 54, 89-96 (Del. Ch. 2014),
aff’d sub nom. RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816 (Del. 2015).
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66
Paramount Commc’ns Inc. v. QVC Network Inc. (QVC), 637 A.2d 34, 44 (Del.
1994).
67
Golden Cycle, LLC v. Allan, C.A. No. 16301, 1998 WL 892631, at *16 (Del. Ch.
Dec. 10, 1998); accord In re MONY Grp. Inc. S’holder Litig., 852 A.2d 9, 15 (Del. Ch.
2004).
68
In re Dollar Thrifty S’holder Litig., 14 A.3d 573 (Del. Ch. 2010).
69
Id. at 578.
70
Id. at 595-96.
71
In re Family Dollar Stores, Inc. Stockholder Litig., C.A. No. 9985-CB, 2014 WL
7246436 (Del. Ch. Dec. 19, 2014).
72
Id. at *16.
73
C&J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret.
Tr., 107 A.3d 1049, 1053 (Del. 2014).
74
Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1286 (Del. 1989);
Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989).
75
Macmillan, 559 A.2d at 1287.
76
In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975 (Del. Ch. 2005).
77
In re Smurfit-Stone Container Corp. S’holder Litig., C.A. No. 6164-VCP, 2011
WL 2028076, at *17, *18, *22 (Del. Ch. May 24, 2011).
78
In re Plains Expl. & Prod. Co. Stockholder Litig., C.A. No. 8090-VCN, 2013 WL
1909124, at *5 (Del. Ch. May 9, 2013) (internal quotation marks omitted).
79
C&J Energy Servs., 107 A.3d at 1067-68.
80
In re Topps Co. S’holders Litig., 926 A.2d 58 (Del. Ch. 2007) (entering injunction
requiring waiver of standstill agreement with potential bidder during go-shop period to
allow potential bidder to make an offer).
81
See, e.g., In re Cogent, Inc. S’holders Litig., 7 A.3d 487, 497-98 (Del. Ch. 2010).
82
In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171 (Del. Ch. 2007); see
also Tr. of Oral Arg. on Pls.’ Mot. for Prelim. Inj. at 14, 20, Forgo v. Health Grades,
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Inc., C.A. No. 5716-VCS, 2010 WL 9036904 (Del. Ch. Sept. 3, 2010) (criticizing the
target’s board for failing to “sift through possible . . . buyers and make a judgment about
whether there might be someone who would be interested” and create “any record that it
really segmented the market or considered whether there was a likely buyer”).
83
Netsmart, 924 A.2d at 198-99.
84
Id. at 209.
85
Koehler v. NetSpend Holdings Inc., C.A. No. 8373-VCG, 2013 WL 2181518
(Del. Ch. May 21, 2013).
86
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009).
87
RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816 (Del. 2015).
88
Id. at 830-31.
89
In re Rural Metro Corp. Stockholders Litig., 88 A.3d 54, 94 (Del. Ch. 2014), aff’d
sub nom. RBC Capital Mkts., 129 A.3d 816.
90
In re Rural/Metro Corp. Stockholders Litig., 102 A.3d 205, 224 (Del. Ch. 2014),
aff’d sub nom. RBC Capital Mkts., 129 A.3d 816.
91
RBC Capital Mkts., 129 A.3d at 860; see also In re Del Monte Foods Co.
S’holders Litig., 25 A.3d 813 (Del. Ch. 2011) (finding implied Revlon violation due to
board’s failure to oversee conduct of financial advisors).
92
In re PLX Tech. Inc. Stockholders Litig, C.A. No. 9880-VCL, 2018 WL 5018535
(Del. Ch. Oct. 16, 2018), aff’d, 211 A.3d 137, 2019 WL 2144476 (Del. 2019).
93
Id. at *47.
94
Id. at *45-47.
95
Id. at *47.
96
See, e.g., Paramount Commc’ns Inc. v. QVC Network Inc. (QVC), 637 A.2d 34,
45 (Del. 1994); Barkan v. Amsted Indus., Inc., 567 A.2d 1279 (Del. 1989). Two
subsequent Delaware Supreme Court decisions confirm that board actions subject to
review under Unocal in the context of an active takeover defense will in other
circumstances need to satisfy only the standard business judgment analysis. In Williams
v. Geier, 671 A.2d 1368 (Del. 1996), the Delaware Supreme Court reiterated that
adoption of a defensive measure approved by shareholder vote would not be subjected to
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Unocal scrutiny since it would not constitute unilateral board action. In Kahn ex rel.
DeKalb Genetics Corp. v. Roberts, 679 A.2d 460 (Del. 1996), the Delaware Supreme
Court refused to apply Unocal’s enhanced scrutiny to a share repurchase program,
because that program was not initiated in response to any perceived threat.
97
Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1373, 1388 (Del. 1995).
98
The Delaware Court of Chancery’s decision in Santa Fe, which concluded that
the adoption of a “discriminatory” rights plan to defend against a third-party unsolicited,
all-cash all-shares offer was a reasonable measure under Unocal, again recognizes the
board’s discretion in preserving a strategic plan. In re Santa Fe Pac. Corp. S’holder
Litig., C.A. No. 13587, 1995 WL 334258, at *9-10 (Del. Ch. May 31, 1995), aff’d in
part, rev’d in part, 669 A.2d 59, 71-72 (Del. 1995).
99
Chesapeake Corp. v. Shore, 771 A.2d 293, 344 (Del. Ch. 2000).
100
Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d 48, 129 (Del. Ch. 2011).
101
Id.
102
ACE Ltd. v. Capital Re Corp., 747 A.2d 95, 108 (Del. Ch. 1999); see also Phelps
Dodge Corp. v. Cyprus Amax Minerals Co., C.A. Nos. 17398, 17383, 17427, 1999 WL
1054255, at *2 (Del. Ch. Sept. 27, 1999); La. Mun. Police Emps.’ Ret. Sys. v. Crawford,
918 A.2d 1172, 1181 n.10 (Del. Ch. 2007) (“Nor may plaintiffs rely upon some naturally-
occurring rate or combination of deal protection measures, the existence of which will
invoke the judicial blue pencil. Rather, plaintiffs must specifically demonstrate how a
given set of deal protections operate in an unreasonable, preclusive, or coercive manner,
under the standards of this Court’s Unocal jurisprudence, to inequitably harm
shareholders.”).
103
Crawford, 918 A.2d at 1181 n.10 (emphasis omitted).
104
Paramount Commc’ns, Inc. v. Time Inc. (Time-Warner), 571 A.2d 1140, 1153
(Del. 1990).
105
Compare Gilbert v. El Paso Co., 575 A.2d 1131, 1143-44 (Del. 1990) (holding
that because all of the board’s actions were in response to an unsolicited tender offer
seeking control of company, Unocal standard applied throughout), with In re Santa Fe
Pac. Corp. S’holder Litig., C.A. No. 13587, 1995 WL 334258, at *9 n.7 (Del. Ch. May
31, 1995) (holding that the board’s decision to enter into original stock-for-stock merger
was subject to business judgment review, but altered transaction in response to
unsolicited third-party offer must be subjected to enhanced scrutiny under Unocal), aff’d
in part, rev’d in part, 669 A.2d 59 (Del. 1995); Time-Warner, 571 A.2d at 1151 n.14
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(holding that original plan of merger entered into as part of corporate strategy subject to
business judgment rule, while later actions in response to hostile tender offer are subject
to enhanced Unocal standard).
106
Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988).
107
MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118 (Del. 2003).
108
Id. at 1132 (invalidating addition of two board seats for the purpose of impeding
stockholder franchise in a contested election, by diminishing influence of stockholder’s
nominees).
109
Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 808 (Del. Ch. 2007).
110
MM Cos., 813 A.2d at 1131; Stroud v. Grace, 606 A.2d 75, 91 (Del. 1992); see
also Pell v. Kill, 135 A.3d 764, 785 & n.9, 797 n.14 (Del. Ch. 2016).
111
Mercier, 929 A.2d at 809-10; see also Chesapeake Corp. v. Shore, 771 A.2d 293,
323 (Del. Ch. 2000) (“[I]t may be optimal simply for Delaware courts to infuse our
Unocal analyses with the spirit animating Blasius and not hesitate to use our remedial
powers where an inequitable distortion of corporate democracy has occurred.”).
112
Encite LLC v. Soni, C.A. No. 2476-VCG, 2011 WL 5920896, at *20 (Del. Ch.
Nov. 28, 2011) (internal quotation marks omitted).
113
Emerald Partners v. Berlin, 787 A.2d 85, 92 (Del. 2001).
114
In re Tyson Foods, Inc. Consol. S’holder Litig., 919 A.2d 563, 596 (Del. Ch.
2007).
115
N.J. Carpenters Pension Fund v. infoGROUP, Inc., C.A. No. 5334-VCN, 2011
WL 4825888, at *11 (Del. Ch. Oct. 6, 2011).
116
Ams. Mining Corp. v. Theriault, 51 A.3d 1213, 1240 (Del. 2012).
117
See In re Martha Stewart Living Omnimedia, Inc. Stockholder Litig., Cons. C.A.
No. 11202-VCS, 2017 WL 3568089, at *11 (Del. Ch. Aug. 18, 2017) (noting that a
controller not standing on both sides of the transaction “can nonetheless ‘compete’ with
the minority by leveraging its controller status to cause the acquiror to divert
consideration to the controller that would otherwise be paid into the deal”).
118
See, e.g., Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334 (Del.
1987).
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119
See Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 887 & n.20 (Del. Ch.
1999); see also Cede & Co. v. Technicolor, Inc. (Technicolor I), 634 A.2d 345, 362 (Del.
1993), decision modified on reargument, 636 A.2d 956 (Del. 1994).
120
See, e.g., O’Reilly v. Transworld Healthcare, Inc., 745 A.2d 902, 913 (Del. Ch.
1999).
121
See, e.g., Harbor Fin. Partners, 751 A.2d 879.
122
See, e.g., Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997).
123
In re Trados Inc. S’holder Litig., 73 A.3d 17 (Del. Ch. 2013).
124
See Solomon v. Armstrong, 747 A.2d 1098, 1118 (Del. Ch. 1999), aff’d, 746 A.2d
277 (Del. 2000); In re Gen. Motors Class H S’holders Litig., 734 A.2d 611, 617 (Del. Ch.
1999); see also LC Capital Master Fund, Ltd. v. James, 990 A.2d 435, 451 (Del. Ch.
2010).
125
Cinerama, Inc. v. Technicolor, Inc. (Technicolor II), 663 A.2d 1134, 1153 (Del.
Ch. 1994) (internal citations omitted), aff’d, Cinerama, Inc. v. Technicolor, Inc.
(Technicolor III), 663 A.2d 1156 (Del. 1995).
126
Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983); accord Kahn v. Lynch
Commc’n Sys., Inc., 638 A.2d 1110, 1115 (Del. 1994) (quoting Weinberger, 457 A.2d at
711).
127
Weinberger, 457 A.2d at 711.
128
Technicolor II, 663 A.2d at 1143.
129
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 307 (Del. 2015).
130
In re Sea-Land Corp. S’holders Litig., C.A. No. 8453, 1988 WL 49126, at *3
(Del. Ch. May 13, 1988).
131
Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, C.A. No. 11802-
VCL, 2018 WL 3326693, at *26 (Del. Ch. July 6, 2018) (quoting Superior Vision Servs.,
Inc. v. ReliaStar Life Ins. Co., C.A. No. 1668-N, 2006 WL 2521426, at *4 (Del. Ch. Aug.
25, 2006)).
132
In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 551-52 (Del. Ch. 2003).
133
In re W. Nat’l Corp. S’holders Litig., C.A. No. 15927, 2000 WL 710192 (Del. Ch.
May 22, 2000).
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134
In re Tesla Motors, Inc. Stockholder Litig., C.A. No. 12711-VCS, 2018 WL
1560293 (Del. Ch. Mar. 28, 2018).
135
Id. at *15-16, *19.
136
Id. at *17.
137
FrontFour Capital Grp. LLC v. Taube, C.A. No. 2019-0100-KSJM, 2019 WL
1313408, at *21-22, *25 (Del. Ch. Mar. 11, 2019).
138
Sciabacucchi v. Liberty Broadband Corp., C.A. No. 11418-VCG, 2017 WL
2352152, at *17 (Del. Ch. May 31, 2017).
139
Williamson v. Cox Commc’ns, Inc., C.A. No. 1663-N, 2006 WL 1586375, at *2-5
& n.4 (Del. Ch. June 5, 2006).
140
Sciabacucchi, 2017 WL 2352152, at *17-18.
141
In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 983 (Del. Ch. 2014),
aff’d sub nom. Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015).
142
In re Tesla Motors, Inc. Stockholder Litig., C.A. No. 12711-VCS, 2018 WL
1560293, at *18-19 (Del. Ch. Mar. 28, 2018); In re Zhongpin Inc. Stockholders Litig.,
C.A. No. 7393-VCN, 2014 WL 6735457, at *7-8 (Del. Ch. Nov. 26, 2014), rev’d on
other grounds sub nom. In re Cornerstone Therapeutics Inc., Stockholder Litig., 115
A.3d 1173 (Del. 2015).
143
Zhongpin, 2014 WL 6735457, at *7-8.
144
In re Hansen Med., Inc. Stockholder Litig., C.A. No. 12316-VCMR, 2018 WL
3025525, at *8 (Del. Ch. June 18, 2018).
145
Garfield v. BlackRock Mortgage Ventures, LLC, C.A. No. 2018-0917-KSJM,
2019 WL 7168004 (Del. Ch. Dec. 20, 2019).
146
Sheldon v. Pinto Tech. Ventures, L.P., 220 A.3d 245, 252 (Del. 2019) (internal
quotation marks omitted).
147
Sheldon, 220 A.3d at 255.
148
In re Tesla Motors, Inc. Stockholder Litig., C.A. No. 12711-VCS, 2018 WL
1560293, at *18-19 (Del. Ch. Mar 28, 2018); Zhongpin, 2014 WL 6735457, at *7-8.
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149
In re Tele-Commc’ns, Inc. S’holders Litig., C.A. No. 16470, 2005 WL 3642727,
at *11 (Del. Ch. Dec. 21, 2005).
150
In re John Q. Hammons Hotels Inc. S’holder Litig., C.A. No. 758-CC, 2009 WL
3165613, at *12, *18 (Del. Ch. 2009); see also In re John Q. Hammons Hotels Inc.
S’holder Litig., C.A. No. 758-CC, 2011 WL 227634 (Del. Ch. Jan. 14, 2011).
151
In reaching its decision, the Court noted that the members of the special
committee were “highly qualified” and had “extensive experience,” “understood their
authority and duty to reject any offer that was not fair to the unaffiliated stockholders”
and were “thorough, deliberate, and negotiated at arm’s length with [multiple bidders]
over a nine month period to achieve the best deal available for the minority
stockholders.” John Q. Hammons, 2011 WL 227634, at *2.
152
In re Delphi Fin. Grp. S’holder Litig., C.A. No. 7144–VCG, 2012 WL 729232
(Del. Ch. Mar. 6, 2012).
153
Id at *7.
154
Id. at *16.
155
Id. at *19, *21.
156
See Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997); Kahn v. Lynch Commc’n
Sys., Inc., 638 A.2d 1110 (Del. 1994); Rosenblatt v. Getty Oil Co., 493 A.2d 929 (Del.
1985).
157
Ams. Mining Corp. v. Theriault, 51 A.3d 1213, 1243 (Del. 2012).
158
Id. at 1244.
159
Kahn v. M&F Worldwide Corp., 88 A.3d 635, 639, 642 (Del. 2014).
160
See, e.g., Gesoff v. IIC Indus. Inc., 902 A.2d 1130 (Del. Ch. 2006) (criticizing a
special committee that did not bargain effectively, had limited authority, and was advised
by legal and financial advisors selected by the controlling shareholder); In re Tele-
Commc’ns, Inc. S’holders Litig., C.A. No. 16470, 2005 WL 3642727 (Del. Ch. Dec. 21,
2005); In re Emerging Commc’ns, Inc. S’holders Litig., C.A. No. 16415, 2004 WL
1305745 (Del. Ch. June 4, 2004) (criticizing a special committee that never met to
consider the transaction together).
161
Del. Cty. Emps.’ Ret. Fund v. Sanchez, 124 A.3d 1017, 1019 (Del. 2015).
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162
See Orman v. Cullman, C.A. No. 18039, 2004 WL 2348395, at *5 (Del. Ch. Oct.
20, 2004).
163
Cf. Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997) (reversing trial court’s
decision to place burden of proving unfairness on plaintiffs in part on the Delaware
Supreme Court’s finding that three members of the special committee had previous
affiliations with the buyer and received financial compensation or influential positions
from the buyer).
164
Emerging Commc’ns, 2004 WL 1305745.
165
Harbor Fin. Partners v. Huizenga, 751 A.2d 879 (Del. Ch. 1999); see also Mizel
v. Connelly, C.A. No. 16638, 1999 WL 550369, at *4 (Del. Ch. Aug. 2, 1999) (stating
that close familial ties should “go a long (if not the whole) way toward creating a
reasonable doubt” as to independence).
166
Sanchez, 124 A.3d at 1019.
167
Sandys v. Pincus, 152 A.3d 124, 135 (Del. 2016).
168
Id. at 126.
169
Cumming v. Edens, C.A. No. 13007-VCS, 2018 WL 992877, at *14-16 (Del. Ch.
Feb. 20, 2018).
170
Id. at *16.
171
In re Oracle Corp. Derivative Litig., C.A. No. 2017-0337-SG, 2018 WL 1381331,
at *17 (Del. Ch. Mar. 19, 2018).
172
Id.
173
See also In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808 (Del. Ch.
2005) (dismissing plaintiffs’ claims that the acquiror “overpaid” for the target because
claims were derivative and therefore could not survive if a majority of the acquiror’s
board was independent, and concluding that the overwhelming majority of directors were
in fact independent, despite directors’ various business relationships with the acquiror
and (in some cases) leadership positions held by directors of charitable institutions that
were alleged to be major recipients of the acquiror’s corporate giving), aff’d, 906 A.2d
766 (Del. 2006).
174
Yucaipa Am. All. Fund II, L.P. v. Riggio, 1 A.3d 310 (Del. Ch. 2010), aff’d, 15
A.3d 218 (Del. 2011).
-206-
175
See Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53 (Del. 1989).
176
In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 997 (Del. Ch. 2014).
177
Kahn v. M&F Worldwide Corp., 88 A.3d 635, 639, 649 (Del. 2014).
178
Id. at 648 n.26.
179
Sandys v. Pincus, 152 A.3d 124, 133 (Del. 2016).
180
Id. at 134.
181
In re Plains Expl. & Prod. Co. Stockholder Litig., C.A. No. 8090-VCN, 2013 WL
1909124, at *5 (Del. Ch. May 9, 2013) (quoting Gesoff v. IIC Indus. Inc., 902 A.2d 1130,
1145 (Del. Ch. 2006)).
182
See Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1115 (Del. 1994).
183
See, e.g., Technicolor I, 634 A.2d 345 (Del. 1993), decision modified on
reargument, 636 A.2d 956 (Del. 1994).
184
In re Digex, Inc. S’holders Litig., 789 A.2d 1176 (Del. Ch. 2000).
185
McMullin v. Beran, 765 A.2d 910 (Del. 2000).
186
Rabkin v. Olin Corp., C.A. No. 7547, 1990 WL 47648, at *6 (Del. Ch. Apr. 17,
1990), aff’d, 586 A.2d 1202 (Del. 1990); accord Kahn v. Dairy Mart Convenience
Stores, Inc., C.A. No. 12489, 1996 WL 159628, at *6 (Del. Ch. Mar. 29, 1996).
187
In re Dole Food Co. Stockholder Litig., C.A. Nos. 8703-VCL, 9079-VCL, 2015
WL 5052214, at *29-30 (Del. Ch. Aug. 27, 2015) (quoting Kahn v. Tremont Corp., C.A.
No. 12339, 1996 WL 145452, at *16 (Del. Ch. Mar. 21, 1996), rev’d, 694 A.2d 422 (Del.
1997)).
188
ACP Master, Ltd. v. Sprint Corp., C.A. Nos. 8508-VCL, 9042-VCL, 2017 WL
3421142, at *23 (Del. Ch. July 21, 2017); see also In re Dole Food Co., 2015 WL
5052214, at *29.
189
Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1115 (Del. 1994).
190
See Gesoff v. IIC Indus. Inc., 902 A.2d 1130, 1150 (Del. Ch. 2006).
191
In re S. Peru Copper Corp. S’holder Derivative Litig., 30 A.3d 60 (Del. Ch.
2011), revised and superseded, 52 A.3d 761 (Del. Ch. 2011).
-207-
192
Id. at 97-98.
193
See Ams. Mining Corp. v. Theriault, 51 A.3d 1213 (Del. 2012).
194
See La. Mun. Police Emps’. Ret. Sys. v. Fertitta, C.A. No. 4339-VCL, 2009 WL
2263406, at *8 n.34 (Del. Ch. July 28, 2009).
195
Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1117 (Del. 1994).
196
ACP Master, Ltd. v. Sprint Corp., C.A. Nos. 8508-VCL, 9042-VCL, 2017 WL
3421142 (Del. Ch. July 21, 2017).
197
Id. at *29.
198
Id.
199
See, e.g., In re Rural Metro Corp. Stockholders Litig., 88 A.3d 54, 90 (Del. Ch.
2014).
200
See, e.g., In re El Paso Pipeline Partners, L.P. Derivative Litig., C.A. No. 7141-
VCL, 2015 WL 1815846 (Del. Ch. Apr. 20, 2015).
201
Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1279-80 (Del. 1989).
202
In re Tele-Commc’ns, Inc. S’holders Litig., C.A. No. 16470, 2005 WL 3642727,
at *10 (Del. Ch. Dec. 21, 2005).
203
Gesoff v. IIC Indus. Inc., 902 A.2d 1130 (Del. Ch. 2006).
204
In re Emerging Commc’ns, Inc. S’holders Litig., C.A. No. 16415, 2004 WL
1305745, at *32 (Del. Ch. June 4, 2004).
205
See, e.g., RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816, 864 (Del. 2015).
206
See, e.g., In re Lukens Inc. S’holders Litig., 757 A.2d 720, 737 (Del. Ch. 1999),
aff’d sub nom. Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000); Schiff v. RKO Pictures
Corp., 104 A.2d 267, 270-72 (Del. Ch. 1954).
207
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 305-06 (Del. 2015).
208
Id. at 312-14.
209
Id. at 309-11 & n.19 (distinguishing Gantler v. Stephens, 965 A.2d 695, 713-14
(Del. 2009)).
-208-
210
In re Volcano Corp. Stockholder Litig., 143 A.3d 727, 747 (Del. Ch. 2016) (“I
conclude that the acceptance of a first-step tender offer by fully informed, disinterested,
uncoerced stockholders representing a majority of a corporation’s outstanding shares in a
two-step merger under Section 251(h) has the same cleansing effect under Corwin as a
vote in favor of a merger by a fully informed, disinterested, uncoerced stockholder
majority.”), aff’d 156 A.3d 697 (Del. 2017) (TABLE) ; see also Larkin v. Shah, C.A. No.
10918-VCS, 2016 WL 4485447, at *1 (Del. Ch. Aug. 25, 2016) (applying Corwin to
tender offer under 8 Del. C. § 251(h)).
211
Singh v. Attenborough, 137 A.3d 151, 151-52 (Del. 2016).
212
Id. at 152.
213
Id. at 152-53.
214
Larkin, 2016 WL 4485447, at *13; see also In re Solera Holdings, Inc.
Stockholder Litig., C.A. No. 11524-CB, 2017 WL 57839, at *6 n.28 (Del. Ch. Jan. 5,
2017); Order, Chester Cty. Ret. Sys. v. Collins, C.A. No. 12072-VCL, 2016 WL 7117924,
at *2 (Del. Ch. Dec. 6, 2016).
215
In re Merge Healthcare Inc. S’holders Litig., C.A. No. 11388-VCG, 2017 WL
395981, at *7 (Del. Ch. Jan. 30, 2017) (noting that an unconflicted controller would not
exempt a transaction from cleansing under Corwin); Larkin, 2016 WL 4485447, at *13.
216
In re Solera, 2017 WL 57839, at *7-8; see also Morrison v. Berry, 191 A.3d 268,
282 n.60 (Del. 2018) (endorsing framework).
217
In re Solera, 2017 WL 57839, at *7.
218
See Corwin, 125 A.3d at 312 (“[I]f troubling facts regarding director behavior
were not disclosed that would have been material to a voting stockholder, then the
business judgment rule is not invoked.”). The materiality standard required under
Corwin is the same standard applied elsewhere under Delaware law, which tracks the
federal securities laws. See In re Solera, 2017 WL 57839, at *9.
219
See Nguyen v. Barrett, C.A. No. 11511-VCG, 2016 WL 5404095, at *7 (Del. Ch.
Sept. 28, 2016).
220
See In re Merge Healthcare, 2017 WL 395981, at *10 (noting the Court’s
preference to remedy disclosure deficiencies before closing but declining to consider
whether failure to do so prevents using disclosures to circumvent Corwin).
221
Morrison, 191 A.3d at 284-88.
-209-
222
Id. at 272.
223
Appel v. Berkman, 180 A.3d 1055 (Del. 2018).
224
In re Xura, Inc. Stockholder Litig., C.A. No. 12698-VCS, 2018 WL 6498677, at
*12 (Del. Ch. Dec. 10, 2018).
225
Chester Cty. Emps.’ Ret. Fund v. KCG Holdings, Inc., C.A. No. 2017-0421-
KSJM, 2019 WL 2564093, at *12 (Del. Ch. June 21, 2019).
226
In re Merge Healthcare, C.A. No. 11388-VCG, 2017 WL 395981, at *6 (Del. Ch.
Jan. 30, 2017); Larkin v. Shah, C.A. No. 10918-VCS, 2016 WL 4485447, at *9, *12
(Del. Ch. Aug. 25, 2016) (“Coercion is deemed inherently present in controlling
stockholder transactions of both the one-sided and two-sided variety, but not in
transactions where the concerns justifying some form of heightened scrutiny derive solely
from board-level conflicts or lapses of due care.”).
227
Sciabacucchi v. Liberty Broadband Corp., C.A. No. 11418-VCG, 2017 WL
2352152, at *17-18 (Del. Ch. May 31, 2017).
228
Id. at *20.
229
Id. at *21-22.
230
In re Saba Software, Inc. Stockholder Litig., C.A. No. 10697-VCS, 2017 WL
1201108, at *15-16 (Del. Ch. Mar 31, 2017).
231
In re Massey Energy Co. Derivative & Class Action Litig., 160 A.3d 484, 507
(Del. Ch. 2017).
232
Lavin v. W. Corp., C.A. No. 2017-0547-JRS, 2017 WL 6728702, at *10 (Del. Ch.
Dec. 29, 2017).
233
In re Paramount Gold & Silver Corp. Stockholders Litig., C.A. No. 10499-CB,
2017 WL 1372659, at *6-9, *14 (Del. Ch. Apr. 13, 2017).
234
See In re Martha Stewart Living Omnimedia, Inc. Stockholder Litig., Cons. C.A.
No. 11202-VCS, 2017 WL 3568089, at *16-18 (Del. Ch. Aug. 18, 2017); IRA Trust FBO
Bobbie Ahmed v. Crane, C.A. No. 12742-CB, 2017 WL 6335912, at *11 (Del. Ch. Dec.
11, 2017); see also In re Ezcorp Inc. Consulting Agreement Derivative Litig., C.A. No.
9962-VCL, 2016 WL 301245, at *11 (Del. Ch. Jan. 25, 2016).
235
Kahn v. M&F Worldwide Corp., 88 A.3d 635, 645 (Del. 2014).
-210-
236
Id. at 644.
237
Id. at 646.
238
Flood v. Synutra Int’l, Inc., 195 A.3d 754, 762 (Del. 2018).
239
Olenik v. Lodzinski, 208 A.3d 704, 717 (Del. 2019).
240
Id.
241
In re Books-A-Million Stockholders Litig.. Cons. C.A. No. 11343-VCL, 2016 WL
5874974, at *11 (Del. Ch. Oct. 10, 2016).
242
Id. at *15-16.
243
Id. at *15.
244
Arkansas Teacher Ret. Sys. v. Alon USA Energy, Inc., 2019 WL 2714331, at *19
(Del. Ch. June 28, 2019).
245
Id. at *20.
246
In re Martha Stewart Living Omnimedia, Inc. Stockholder Litig., Cons. C.A. No.
11202-VCS, 2017 WL 3568089, at *16-18 (Del. Ch. Aug. 18, 2017).
247
Id.
248
IRA Trust FBO Bobbie Ahmed v. Crane, C.A. No. 12742-CB, 2017 WL 6335912,
at *11 (Del. Ch. Dec. 11, 2017).
249
Tornetta v. Musk, C.A. No. 2018-0408-JRS, 2019 WL 4566943 (Del. Ch. Sept.
20, 2019).
250
Martin Marietta Materials, Inc. v. Vulcan Materials Co., 56 A.3d 1072 (Del. Ch.
2012), aff’d, 68 A.3d 1208 (Del. 2012).
251
Order, Depomed Inc. v. Horizon Pharma, PLC, No. 1-15-CV-283834, 2014 WL
7433326 (Cal. Super. Ct. Nov. 19, 2015).
252
Id. at *2-3.
253
See RAA Mgmt., LLC v. Savage Sports Holdings, Inc., 45 A.3d 107 (Del. 2012).
-211-
254
PharmAthene, Inc. v. SIGA Techs., Inc., C.A. No. 2627-VCP, 2010 WL 4813553,
at *2 (Del. Ch. Nov. 23, 2010) (citing Hindes v. Wilmington Poetry Soc’y, 138 A.2d 501,
502-04 (Del. Ch. 1958)).
255
Tr. of Oral Arg., Glob. Asset Capital, LLC v. Rubicon US Reit, Inc., C.A. No.
5071-VCL (Del. Ch. Nov. 16, 2009), available at
https://www.delawarelitigation.com/uploads/file/int6A4.PDF.
256
Id.
257
SIGA Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330, 336 (Del. 2013).
258
Id. at 346-47.
259
Id. at 346.
260
C&J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret.
Tr., 107 A.3d 1049, 1067 (Del. 2014) (quoting Barkan v. Amsted Indus., Inc., 567 A.2d
1279, 1286 (Del. 1989)); Paramount Commc’ns Inc. v. QVC Network Inc. (QVC), 637
A.2d 34, 44 (Del. 1994).
261
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 242 (Del. 2009).
262
In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 192 (Del. Ch. 2007).
263
In re Fort Howard Corp. S’holders Litig., C.A. No. 9991, 1988 WL 83147 (Del.
Ch. Aug. 8, 1988).
264
See, e.g., In re MONY Grp. Inc. S’holder Litig., 852 A.2d 9 (Del. Ch. 2004)
(denying shareholder plaintiffs’ request for injunctive relief based upon allegations that
the MONY board of directors, having decided to put the company up for sale, failed to
fulfill their fiduciary duties by foregoing an auction in favor of entering into a merger
agreement with a single bidder and allowing for a post-signing market check).
265
In re Smurfit-Stone Container Corp. S’holder Litig., C.A. No. 6164-VCP, 2011
WL 2028076, at *19 n.133 (Del. Ch. May 24, 2011).
266
Fort Howard, 1988 WL 83147; see C&J Energy Servs., Inc. v. City of Miami
Gen. Emps.’ & Sanitation Emps.’ Ret. Tr., 107 A.3d 1049, 1070 (Del. 2014) (“In prior
cases like In re Fort Howard Corporation Shareholders Litigation, this sort of passive
market check was deemed sufficient to satisfy Revlon.”).
267
Fort Howard, 1988 WL 83147, at *13.
-212-
268
In re Plains Expl. & Prod. Co. Stockholder Litig., C.A. No. 8090-VCN, 2013
WL1909124 at *5 (Del. Ch. May 9, 2013) (citing In re Pennaco Energy, Inc., 787 A.2d
691, 707 (Del. Ch.
2001)).
269
Koehler v. NetSpend Holdings Inc., C.A. No. 8373-VCG, 2013 WL 2181518
(Del. Ch. May 21, 2013).
270
Id. at *19.
271
Id. at *20.
272
In re Topps Co. S’holders Litig., 926 A.2d 58, 86-87 (Del. Ch. 2007); see also In
re Lear Corp. S’holder Litig., 926 A.2d 94, 119-20 (Del. Ch. 2007).
273
In re Topps, 926 A.2d at 86.
274
In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813 (Del. Ch. 2011).
275
Cinerama, Inc. v. Technicolor, Inc. (Technicolor II), 663 A.2d 1134, 1142 (Del.
Ch. 1994).
276
See generally Leo E. Strine, Jr., Documenting the Deal: How Quality Control
and Candor Can Improve Boardroom Decision-Making and Reduce the Litigation Target
Zone, 70 BUS. LAW. 679 (May 2015).
277
See, e.g., Smith v. Van Gorkom (Trans Union), 488 A.2d 858, 876-77 (Del. 1985).
278
Varjabedian v. Emulex Corp., 888 F.3d 399 (9th Cir. 2018).
279
In re PLX Tech. Inc. Stockholders Litig., C.A. No. 9880-VCL, 2018 WL 5018535
(Del. Ch. Oct. 16, 2018).
280
Id.
281
Scott v. DST Sys., Inc., C.A. Nos. 18-cv-00286-RGA, 18-cv-00322-RGA, 2019
WL 3997097 (D. Del. Aug. 23, 2019).
282
See Tr. of Ruling of the Ct. on Pls.’ Mot. For a Prelim. Inj. at 15, Steinhardt v.
Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 24, 2011) (ordering disclosure
concerning, among other things, “what appear to be longitudinal changes from previous
Jefferies’ books that resulted in the final book making the deal look better than it would
have had the same metrics been used that were used in prior books.”).
-213-
283
See, e.g., In re El Paso Corp. S’holder Litig., 41 A.3d 432 (Del. Ch. 2012).
284
See Self-Regulatory Organizations, SEC Release No. 34-56645, 91 SEC Docket
2216 (Oct. 11, 2007).
285
See FINRA Manual, FINRA Rule 5150.
286
In re Tele-Commc’ns, Inc. S’holders Litig., C.A. No. 16470, 2005 WL 3642727,
at *10 (Del. Ch. Dec. 21, 2005).
287
In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1005 (Del. Ch. 2005).
288
Id.
289
In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813 (Del. Ch. 2011).
290
Id. at 835 (internal quotations and citations omitted).
291
In re Rural Metro Corp. Stockholders Litig., 88 A.3d 54 (Del. Ch. 2014).
292
Id at 100.
293
RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816, 865 (Del. 2015).
294
Id. at 866.
295
Id. at 855 n.129.
296
Id. at 856.
297
See, e.g., In re Zale Corp. Stockholders Litig., C.A. No. 9388-VCP, 2015 WL
6551418 (Del. Ch. Oct. 29, 2015); Singh v. Attenborough, 137 A.3d 151 (Del. 2016).
298
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015).
299
Singh v. Attenborough, 137 A.3d at 151-52.
300
In re Volcano Corp. Stockholder Litig., 143 A.3d 727, 750 (Del. Ch. 2016); In re
Volcano Corp. Stockholder Litig., 156 A.3d 697 (Del. 2017).
301
Buttonwood Tree Value Partners L.P. v. R.L. Polk & Co., C.A. No. 9250-VCG,
2017 WL 3172722, at *10 (Del. Ch. July 24, 2017).
302
Id. at *11.
-214-
303
Singh v. Attenborough, 137 A.3d at 153.
304
In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813, 832 (Del. Ch. 2011).
305
Vento v. Curry, C.A. No. 2017-0157-AGB, 2017 WL 1076725, at *4 (Del. Ch.
Mar. 22, 2017).
306
Id.; Cf.,Order, In re Columbia Pipeline Grp., Inc. S’holder Litig., C.A. No.
12152-VCL, 2017 WL 898382, at *4 (Del. Ch. Mar. 7, 2017) (citing In re Micromet, Inc.
S’holders Litig., C.A. No. 7197-VCP, 2012 WL 681785 (Del. Ch. Feb. 29, 2012) as
dispositive authority that disclosure of a sell-side investment advisor’s financial interest
in the buyer in its Form 13F (and not in the merger proxy statement) is sufficient
disclosure, particularly where the balance of the investment advisor’s ownership does not
create an economic conflict).
307
English v. Narang, C.A. No. 2018-0221-AGB, 2019 WL 1300855 (Del. Ch. Mar.
20, 2019).
308
In re Rouse Props., Inc., Cons. C.A. No. 12194-VCS, 2018 WL 1226015 (Del.
Ch. Mar. 9, 2018).
309
SEC Division of Corporation Finance, Compliance and Disclosure
Interpretations: Tender Offers and Schedules, Questions and Answers of General
Applicability, last updated November 18, 2016, available at
https://www.sec.gov/divisions/corpfin/guidance/cdi-tender-offers-and-schedules.htm.
310
See In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 177 (Del. Ch.
2007); see also Maric Capital Master Fund, Ltd. v. PLATO Learning, Inc., 11 A.3d 1175,
1178 (Del. Ch. 2010) (“[I]n my view, management’s best estimate of the future cash flow
of a corporation that is proposed to be sold in a cash merger is clearly material
information.”).
311
In re 3Com S’holders Litig., C.A. No. 5067-CC, 2009 WL 5173804, at *3 (Del.
Ch. Dec. 18, 2009) (holding that plaintiffs have failed to show how disclosure of full
projections, instead of the summary provided by the financial advisors, would have
altered the “total mix of available information”); see also In re CheckFree Corp.
S’holders Litig., C.A. No. 3193-CC, 2007 WL 3262188 (Del. Ch. Nov. 1, 2007).
312
See David P. Simonetti Rollover IRA v. Margolis, C.A. No. 3694-VCN, 2008 WL
5048692, at *10 (Del. Ch. June 27, 2008) (explaining that “Delaware law requires that
directors disclose the substance of the investment banker’s work, which usually depends
in part upon management’s best estimates,” and holding that a proxy statement that
discloses projections that “reflected management’s best estimates at the time” instead of
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“lower-probability projections” meets the requirement to disclose projections that “would
have been considered material by the reasonable stockholder”).
313
In re Micromet, Inc. S’holders Litig., C.A. No. 7197-VCP, 2012 WL 681785, at
*13 (Del. Ch. Feb. 29, 2012) (quoting Globis Partners, L.P. v. Plumtree Software, Inc.,
C.A. No. 1577-VCP, 2007 WL 4292024, at *10 (Del. Ch. Nov. 30, 2007)) (holding that
there is no legal requirement to disclose projections that present “overly optimistic ‘what-
ifs’”).
314
Tr. of Oral Arg. on Pls.’ Mot. For Prelim. Inj. and Rulings of the Ct. at 24-28, In
re BEA Sys., Inc. S’holder Litig., C.A. No. 3298-VCL (Del. Ch. Mar. 26, 2008).
315
Id. at 94.
316
In re Saba Software, Inc. Stockholder Litig., C.A. No. 10697-VCS, 2017 WL
1201108 at *25 (Del. Ch. Mar. 31, 2017).
317
In re Cyan, Inc. Stockholders Litig., C.A. No. 11027-CB, 2017 WL 1956955, at
*17 (Del. Ch. May 11, 2017).
318
In re PLX Tech. Inc. Stockholders Litig., C.A. No. 9880-VCL, 2018 WL 5018535
(Del. Ch. Oct. 16, 2018).
319
English v. Narang, C.A. No. 2018-0221-AGB, 2019 WL 1300855, at *10 (Del.
Ch. Mar. 20, 2019).
320
SEC Division of Corporation Finance, Compliance and Disclosure
Interpretations: Non-GAAP Financial Measures, last updated April 4, 2018, available at
https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm.
321
Id.
322
Aaron M. Zeid, Esq., Market Conditions January 2019 – Representations and
Warranties Insurance, GALLAGHER (Jan. 2019), available at
https://www.ajg.com/media/1703402/rw-market-condition-report.pdf.
323
See 2019 American Bar Association Private Target Mergers & Acquisitions Deal
Points Study, at 116.
324
For a discussion of the impact of transaction forms on anti-assignment and
change-in-control provisions, see generally, Meso Scale Diagnostics, LLC v. Roche
Diagnostics GmbH, 62 A.3d 62, 86-88 (Del. Ch. 2013).
325
See, e.g., DEL. CODE ANN. tit. 8, § 251(h) and § 253 (West 2010).
-216-
326
17 C.F.R. § 240.14e-1(a).
327
In re Siliconix Inc. S’holders Litig., C.A. No. 18700, 2001 WL 716787 (Del. Ch.
June 19, 2001); see also Glassman v. Unocal Expl. Corp., 777 A.2d 242, 243 (Del.
2001).
328
In re CNX Gas Corp. S’holders Litig., 4 A.3d 397 (Del. Ch. 2010); see also In re
Pure Res., Inc. S’holders Litig., 808 A.2d 421 (Del. Ch. 2002); In re Cox Commc’ns, Inc.
S’holders Litig., 879 A.2d 604 (Del. Ch. 2005).
329
Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014).
330
See also In re Cornerstone Therapeutics Inc. Stockholder Litig., 115 A.3d 1173,
1184 n.45 (Del. 2015) (criticizing incentive structure created by the Siliconix line of
cases).
331
See DEL. CODE ANN. tit. 8, § 251(h) (West 2013).
332
In re Volcano Corp. Stockholder Litig., 143 A.3d 727 (Del. Ch. 2016).
333
Id. at 744.
334
SEC Compliance and Disclosure Interpretations, Going Private Transactions,
Exchange Act Rule 13e-3 and Schedule 13E-3, 201.05.
335
See, e.g., Smith v. Van Gorkom (Trans Union), 488 A.2d 858, 875 (Del. 1985).
336
Paramount Commc’ns Inc. v. QVC Network Inc. (QVC), 637 A.2d 34, 43 (Del.
1994).
337
Trans Union, 488 A.2d at 876 (pointing to evidence that members of Trans
Union’s Board “knew that the market had consistently undervalued the worth of Trans
Union’s stock, despite steady increases in the Company’s operating income in the seven
years preceding the merger”).
338
Paramount Commc’ns, Inc. v. Time Inc. (Time-Warner), 571 A.2d 1140, 1150
n.12 (Del. 1990).
339
Id. at 1150; see also id. at 1154 (“Directors are not obliged to abandon a
deliberately conceived corporate plan for a short-term shareholder profit unless there is
clearly no basis to sustain the corporate strategy.”); Frederick Hsu Living Tr. v. ODN
Holding Corp., No. CV 12108-VCL, 2017 WL 1437308, at *18–19 (Del. Ch. Apr. 14,
2017) (“[T]he fiduciary relationship requires that the directors act prudently, loyally, and
in good faith to maximize the value of the corporation over the long-term for the benefit
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of the providers of presumptively permanent equity capital, as warranted for an entity
with a presumptively perpetual life in which the residual claimants have locked in their
investment. . . . The fact that some holders of shares might be market participants who are
eager to sell and would prefer a higher near-term market price likewise does not alter the
presumptively long-term fiduciary focus.”).
340
Time-Warner, 571 A.2d at 1153.
341
See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985); Mills
Acquisition Co. v. Macmillan, Inc., C.A. No. 10168, 1988 WL 108332 (Del. Ch. Oct. 18,
1988), rev’d on other grounds, 559 A.2d 1261 (Del. 1989). In the Macmillan case, the
Delaware Supreme Court noted that it was legitimate for a board to consider the “effect
on the various constituencies” of a corporation, the companies’ long-term strategic plans
and “any special factors bearing on stockholder and public interests” in reviewing merger
offers. 559 A.2d at 1285 n.35.
342
MD. CODE CORPS. & ASS’NS § 2-104(9) (2013) (permitting corporations to adopt a
charter provision that allows the board of directors “in considering a potential acquisition
of control of the corporation, to consider the effect of the potential acquisition of control
on” other constituencies, employees, suppliers, customers, creditors, and communities in
which the corporation’s offices are located); OR. REV. STAT. § 60.357 (1989) (permitting
directors to consider the social, legal and economic effects on constituencies other than
shareholders “[w]hen evaluating any offer of another party to make a tender or exchange
offer for any equity security of the corporation, or any proposal to merge or consolidate
the corporation . . . or to purchase or otherwise acquire all or substantially all the
properties and assets of the corporation”).
343
See, e.g., Tr., Norfolk S. Corp. v. Conrail Inc., C.A. No. 96-CV-7167 (E.D. Pa.
Nov. 19, 1996) (concluding that Pennsylvania’s constituency statute “provides that in
considering the best interests of the corporation or the effects of any action, the directors
are not required to consider the interests of any group, obviously including shareholders,
as a dominant or controlling factor. . .”); Georgia-Pac. Corp. v. Great N. Nekoosa Corp.,
727 F. Supp. 31, 33 (D. Me. 1989) (justifying use of a poison pill in response to a cash
tender offer partly on the basis of Maine’s other constituency statute).
344
See Minnesota Mining and Manufacturing Co., SEC No-Action Letter, 1988 WL
234978 (Oct. 13, 1988) (indicating that the following factors will be considered by the
SEC to conclude that a CVR is not a security: (1) the CVR to be granted to the selling
shareholders is an integral part of the consideration to be received in the proposed
merger; (2) the holders of the CVR will have no rights common to stockholders, such as
voting and dividend rights, nor will they bear a stated rate of interest; (3) the CVRs will
not be assignable or transferable, except by operation of law; and (4) the CVRs will not
be represented by any form of certificate or instrument).
-218-
345
NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 19 (Del. Ch. 2009).
346
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986);
Unocal, 493 A.2d 946; see also supra Section II.B.2.
347
In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1016 (Del. Ch. 2005).
348
Id. at 1021.
349
See, e.g., In re Cogent, Inc. S’holder Litig., 7 A.3d 487, 503-04 (Del. Ch. 2010)
(citing In re Lear Corp. S’holder Litig., 926 A.2d 94, 120 (Del. Ch. 2007)) (observing
that the decision whether to view a termination fee’s preclusive effect in terms of equity
value or enterprise value will depend on the factual circumstances existing in a given
case).
350
In re Answers Corp. S’holders Litig., C.A. No 6170-VCN, 2011 WL 1366780, at
*4 n.52 (Del. Ch. Apr. 11, 2011).
351
In re Comverge, Inc. S’holders Litig., Consol. C.A. No. 7368-VCP, 2014 WL
6686570, at *15-17 (Del. Ch. Nov. 25, 2014).
352
La. Mun. Police Emps.’ Ret. Sys. v. Crawford, 918 A.2d 1172, 1181 n.10 (Del.
Ch. 2007).
353
In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 575 (Del. Ch. 2010).
354
In re Topps Co. S’holders Litig., 926 A.2d 58, 86 (Del. Ch. 2007).
355
Answers, 2011 WL 1366780, at *4 n.52 (noting that, in the context of a relatively
small transaction, a “somewhat higher than midpoint on the ‘range’ is not atypical”).
356
Phelps Dodge Corp. v. Cyprus Amax Minerals Co., C.A. Nos. 17398, 17383,
17427, 1999 WL 1054255 (Del. Ch. Sept. 27, 1999).
357
Id. at *2.
358
In re Lear Corp. S’holder Litig., 967 A.2d 640, 656-57 (Del. Ch. 2008).
359
See H.F. Ahmanson & Co. v. Great W. Fin. Corp., C.A. No. 15650, 1997 WL
305824 (Del. Ch. June 3, 1997).
360
NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 19 (Del. Ch. 2009).
-219-
361
C&J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret.
Tr., 107 A.3d 1049 (Del. 2014).
362
Id. at 1054, 1072.
363
Id. at 1072 n.110 (quoting OTK Assocs. LLC v. Friedman, 85 A.3d 696, 720 n.2
(Del. Ch. 2014)).
364
In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813 (Del. Ch. 2011).
365
Id. at 841 (quoting ACE Ltd. v. Capital Re Corp., 747 A.2d 95, 105-06 (Del. Ch.
1999)).
366
Paramount Commc’ns Inc. v. QVC Network Inc. (QVC), 637 A.2d 34, 47-48 (Del.
1994).
367
Phelps Dodge Corp. v. Cyprus Amax Minerals Co., C.A. Nos. 17398, 17383,
17427. 1999 WL 1054255, at *1 (Del. Ch. Sept. 27, 1999).
368
Koehler v. NetSpend Holdings Inc., C.A. No. 8373-VCG, 2013 WL 2181518, at
*18 (Del. Ch. May 21, 2013) (“It is not per se unreasonable for a board to forgo a go-
shop where it makes an informed decision that such forbearance is part of a process
designed to maximize price.”). Go-shop provisions were found in 2% of deals between
public targets and strategic acquirors in 2016, down from 6% in 2015 and the same as 2%
in 2014. AM. BAR ASS’N, STRATEGIC BUYER/PUBLIC TARGET M&A DEAL POINTS STUDY
51 (2017).
369
Tr. of Telephonic Oral Arg. and Ruling of the Ct., In re Complete Genomics, Inc.
S’holder Litig. (Genomics II), C.A. No. 7888-VCL, 2012 WL 9989212 (Del. Ch. Nov.
27, 2012).
370
Id. at 18.
371
Tr. of Ruling of the Ct., In re Ancestry.com Inc. S’holder Litig., C.A. No. 7988-
CS (Del. Ch. Dec. 17, 2012).
372
See also Koehler, 2013 WL 2181518.
373
See Frontier Oil Corp. v. Holly Corp., C.A. No. 20502, 2005 WL 1039027, at
*27 (Del. Ch. Apr. 29, 2005) (“The Merger Agreement, of course, was not an ordinary
contract. Before the Merger could occur, the shareholders of Holly had to approve it.
The directors of Holly were under continuing fiduciary duties to the shareholders to
evaluate the proposed transaction. The Merger Agreement accommodated those duties
-220-
by allowing, under certain circumstances, the board of directors to withdraw or change its
recommendation to the shareholders that they vote for the Merger.”).
374
Tr. of Telephonic Ruling of the Ct. at 18, In re Complete Genomics, Inc. S’holder
Litig. (Genomics I), C.A. No. 7888-VCL, 2012 WL 9989211 (Del. Ch. Nov. 9, 2012).
375
Tr. of Oral Arg. at 133, In re NYSE Euronext S’holders Litig., C.A. 8136-CS (Del.
Ch. May 10, 2013).
376
See DEL. CODE ANN. tit. 8, § 146 (West 2011).
377
Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003).
378
Id. at 946.
379
See Monty v. Leis, 123 Cal. Rptr. 3d 641, 646 (Ct. App. 2011) (quoting In re Toys
“R” Us, Inc. S’holder Litig., 877 A.2d 975, 1016 n.68 (Del. Ch. 2005), for the
proposition that Omnicare “‘represents . . . an aberrational departure from [the] long
accepted principle’ that what matters is whether the board acted reasonably in light of all
the circumstances”).
380
See Orman v. Cullman, C.A. No. 18039, 2004 WL 2348395 (Del. Ch. Oct. 20,
2004); see also Majority Shareholders’ Voting Agreement Not Impermissible Lock-Up,
Del. Court Says, 7 M&A L. REP. 863 (Nov. 8, 2004).
381
Koehler v. NetSpend Holdings Inc., C.A. No. 8373-VCG, 2013 WL 2181518, at
*17 (Del. Ch. May 21, 2013).
382
Examples of such structures include: The Hillshire Brands Company’s terminated
acquisition of Pinnacle Foods Inc. (2014), Martin Marietta Materials, Inc.’s acquisition of
Texas Industries, Inc. (2014), and Patterson-UTI Energy, Inc.’s acquisition of Seventy
Seven Energy Inc. (2017).
383
In re OPENLANE, Inc. S’holders Litig., C.A. No. 6849-VCN, 2011 WL 4599662
(Del. Ch. Sept. 30, 2011); see also Optima Int’l of Miami, Inc. v. WCI Steel, Inc., C.A.
No. 3833-VCL, 2008 WL 3822429 (Del. Ch. June 17, 2008) (distinguishing Omnicare
and rejecting an argument that a shareholder’s written consent, which was received
within a day of the target board’s approval of the merger agreement, was impermissible
under the Omnicare analysis).
384
See SEC Compliance and Disclosure Interpretation, Securities Act Section 239.13
(Nov. 26, 2008), available at
https://www.sec.gov/divisions/corpfin/guidance/sasinterp.htm.
-221-
385
AM. BAR ASS’N, supra note 361, at 62.
386
Id. at 61, 63.
387
In re BioClinica, Inc. S’holder Litig., C.A. No. 8272-VCG, 2013 WL 5631233, at
*8 (Del. Ch. Oct. 16, 2013); In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 980
(Del. Ch. 2005).
388
Blueblade Capital Opportunities LLC v. Norcraft Cos., C.A. No. 11184-VCS,
2018 WL 3602940, at *25 (Del. Ch. July 27, 2018).
389
Id. at *22.
390
Paramount Commc’ns Inc. v. QVC Network Inc. (QVC), 637 A.2d 34, 39, 51
(Del. 1994).
391
In re Bear Stearns Litig., 870 N.Y.S.2d 709, 730-32 (Sup. Ct. 2008).
392
Tr. of Telephonic Ruling of the Ct., In re Complete Genomics, Inc. S’holder Litig.
(Genomics I), C.A. No. 7888-VCL, 2012 WL 9989211 (Del. Ch. Nov. 9, 2012); Tr. of
Telephonic Oral Arg. and Ruling of the Ct., In re Complete Genomics, Inc. S’holder
Litig. (Genomics II), C.A. No. 7888-VCL, 2012 WL 9989212 (Del. Ch. Nov. 27, 2012).
393
Tr. of Telephonic Ruling of the Ct. at 16, Genomics I, 2012 WL 9989211.
394
In re Comverge, Inc. S’holders Litig., Consol. C.A. No. 7368-VCP, 2014 WL
6686570, at *15-17 (Del. Ch. Nov. 25, 2014).
395
Brown v. Authentec, Inc., Case No. 05-2012-CA-57589 (Fla. Cir. Ct. Sept. 18,
2012), aff’d, 109 So.3d 219 (Fla. Dist. Ct. App. 2013) (table).
396
Tr. of Oral Arg. at 106, In re NYSE Euronext S’holders Litig., C.A. 8136-CS (Del.
Ch. May 10, 2013).
397
Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL, 2018 WL 4719347
(Del. Ch. Oct. 1, 2018).
398
Akorn, Inc. v. Fresenius Kabi AG, 198 A.3d 724 (Del. 2018).
399
Akorn, 2018 WL 4719347, at *50.
400
Id. at *1.
401
Id. at *54-55.
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402
Id. at *2.
403
Id. at *53 (citing In re IBP, Inc. S’holders Litig., 789 A.2d 14, 68 (Del. Ch. 2001).
(footnote omitted). In Ameristar Casinos, Inc. v. Resorts International Holdings, LLC,
the Court accepted the premise, although did not decide, that an MAE had occurred
where there was a 248% increase in the property tax assessment on the target asset, which
translated to a tax liability of $18 million per year for an asset generating $30 million per
year in net income. C.A. No. 3685-VCS, 2010 WL 1875631 (Del. Ch. May 11, 2010).
In 2017, the Court of Chancery extended the heavy burden in finding an MAE from the
acquisition context to a license agreement between Mrs. Fields and Interbake and applied
the test from IBP in assessing whether the standard for termination had been achieved.
Mrs. Fields Brand, Inc. v. Interbake Foods LLC, C.A. No. 12201-CB, 2017 WL 2729860
(Del. Ch. Jun 26, 2017). Notably, the license agreement did not use a defined MAE or
MAC term and instead referred to a “change . . . that is . . . materially adverse to . . . the
business,” which the Court equated with a traditional MAE/MAC standard. Id. at *21-
23. The Court even extended the IBP test to a termination right in the license agreement
that did not use “material adverse” language but instead allowed for termination if the
licensor materially damaged the brand in a way that “renders the performance of [the]
Agreement by Licensee commercially unviable.” Id. at *20. The Court found that despite
no use of “material adverse” language, the magnitude and duration of a loss must meet
MAE-like significance before a party could terminate. Id. at *25-27.
404
Akorn, 2018 WL 4719347, at *53
405
Akorn, 2018 WL 4719347, at *60.
406
Channel Medsystems, Inc. v. Boston Sci. Corp., No. 2018-0673-AGB, 2019 WL
6896462 (Del. Ch. Dec. 18, 2019)
407
IBP Inc., 789 A.2d at 83.
408
Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008).
409
Id. at 738.
410
Id. at 740.
411
Genesco, Inc. v. The Finish Line, Inc., No. 07-2137-II(III), 2007 WL 4698244
(Tenn. Ch. Dec. 27, 2007).
412
Akorn, 2018 WL 4719347, at *49.
413
Id. at *61.
-223-
414
United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810 (Del. Ch. 2007).
415
All. Data Sys. Corp. v. Blackstone Capital Partners V L.P., 963 A.2d 746 (Del.
Ch.), aff’d, 976 A.2d 170 (Del. 2009) (table).
416
James Cable, LLC v. Millennium Dig. Media Sys., L.L.C., C.A. No. 3637-VCL,
2009 WL 1638634 (Del. Ch. June 11, 2009).
417
Id. at *4.
418
A contractual obligation often imposed on parties is a reasonable best efforts
standard whereby the parties covenant to undertake certain actions, often including
obtaining consents and other regulatory approvals. This reasonable best efforts standard
was interpreted in Williams Cos. v. Energy Transfer Equity to mean the party must “take
all reasonable actions to complete the merger” and that the burden is on the alleged
breaching party to prove it has not breached its covenant and failed to satisfy a closing
condition. 159 A.3d 264, 273 (Del. 2017). In this case, the Delaware Supreme Court
found that Energy Transfer Equity had not breached its covenant when its tax counsel did
not deliver a tax opinion that was a required closing condition. Id. at 274.
419
Consol. Edison, Inc. v. Ne. Utils., 426 F.3d 524 (2d Cir. 2005).
420
For a discussion of sample contract language, see Ryan Thomas & Russell Stair,
Revisiting Consolidated Edison—A Second Look at the Case That Has Many Questioning
Traditional Assumptions Regarding the Availability of Shareholder Damages in Public
Company Mergers, 64 BUS. LAW. 329, 349-57 (2009). Cf. Amirsaleh v. Bd. of Trade,
C.A. No. 2822-CC, 2008 WL 4182998 (Del. Ch. Sept. 11, 2008) (holding that
stockholder who received late election form had standing to sue for his preferred form of
consideration after the merger was consummated).
421
Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715, 748 (Del. Ch.
2008).
422
See Paramount Commc’ns, Inc. v. Time Inc. (Time-Warner), 571 A.2d 1140 (Del.
1990).
423
See Tr. of Settlement Hearing, In re Atmel Corp. S’holders Litig., C.A. No. 4161-
CC, 2010 WL 9044679 (Del. Ch. Jan. 7, 2010).
424
Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586 (Del. 2010).
-224-
425
See, e.g., Moran v. Household Int’l, Inc., 500 A.2d 1346, 1346 (Del. 1985);
Leonard Loventhal Account v. Hilton Hotels Corp., C.A. No. 17803, 2000 WL 1528909
(Del. Ch. Oct. 10, 2000), aff’d, 780 A.2d 245 (Del. 2001).
426
See Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1085-88 (Del. Ch. 2004)
(upholding the adoption of a rights plan in the context of a company’s ongoing process of
exploring strategic alternatives, where the court found that the controlling shareholder
seeking to sell its control bloc had breached fiduciary duties and contractual obligations
to the company, such that the normal power of a majority shareholder to sell its stock
without sharing the opportunity with minority holders could not be used to further these
breaches).
427
See Desert Partners, L.P. v. USG Corp., 686 F. Supp. 1289 (N.D. Ill. 1988); BNS
Inc. v. Koppers Co., 683 F. Supp. 458, 474-75 (D. Del. 1988); Moore Corp. v. Wallace
Comput. Servs. Inc., 907 F. Supp. 1545 (D. Del. 1995); Air Prods. & Chems., Inc. v.
Airgas, Inc., 16 A.3d 48 (Del. Ch. 2011).
428
CRTF Corp. v. Federated Dep’t Stores, Inc., 683 F. Supp. 422, 438-42 (S.D.N.Y.
1988) (refusing to enjoin discriminatory application of rights plan during auction); MAI
Basic Four, Inc. v. Prime Comput., Inc., C.A. No. 10428, 1988 WL 140221 (Del. Ch.
Dec. 20, 1988); In re Holly Farms Corp. S’holders Litig., C.A. No. 10350, 1988 WL
143010 (Del. Ch. Dec. 30, 1988).
429
Airgas, 16 A.3d 48.
430
Yucaipa Am. All. Fund II, L.P. v. Riggio, 1 A.3d 310 (Del. Ch. 2010), aff’d, 15
A.3d 218 (Del. 2011); see also In re BioClinica, Inc. S’holder Litig., C.A. 8272-VCG,
2013 WL 673736 (Del. Ch. Feb. 25, 2013).
431
Yucaipa, 1 A.3d at 350.
432
In re Versum Materials, Inc. Stockholder Litig., Consolidated C.A. No. 2019-
0206-JTL (Del. Ch. July 16, 2020).
433
Third Point LLC v. Ruprecht, C.A. Nos. 9496-VCP, 9497-VCP, 9508-VCP, 2014
WL 1922029, at *17, *22 (Del. Ch. May 2, 2014).
434
Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 586 (Del. 2010).
435
In the case of Quickturn Design Systems, Inc. v. Shapiro, the Delaware Supreme
Court ruled that dead hand and no hand provisions—even of limited duration—are
invalid. See Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998). The
Court held that the dead hand feature of the rights plan, which barred a newly elected
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board from redeeming the pill for six months, ran afoul of Section 141(a) of the DGCL,
which empowers the board with the statutory authority to manage the corporation. The
Court also criticized dead hand provisions because they would prevent a newly elected
board “from completely discharging its fundamental management duties to the
corporation and its stockholders for six months” by restricting the board’s power to
negotiate a sale of the corporation. Id. at 1291 (emphasis omitted). The reasoning behind
the Quickturn holding, together with that of the 1998 decision in Carmody v. Toll
Brothers, Inc. (which dealt with a pure dead hand pill rather than a no hand pill), leaves
little room for dead hand provisions of any type in Delaware. Carmody v. Toll Bros., 723
A.2d 1180 (Del. Ch. 1998). In contrast to Delaware, courts in both Georgia and
Pennsylvania have upheld the validity of dead hand and no hand provisions. See
Invacare Corp. v. Healthdyne Techs. Inc., 968 F. Supp. 1578 (N.D. Ga. 1997); AMP Inc.
v. Allied Signal, Inc., C.A. Nos. 98-4405, 98-4058, 98-4109, 1998 WL 778348 (E.D. Pa.
Oct. 8, 1998), partial summary judgment granted, 1998 WL 967579 (E.D. Pa. Nov. 18,
1998), rev’d and remanded, 168 F.3d 649 (3d Cir. 1999).
436
Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182, 1185 (Del. 2010).
437
See DEL. CODE ANN. tit. 8, § 141(k)(1).
438
Icahn Partners LP v. Amylin Pharm., Inc., No. 7404-VCN, 2012 WL 1526814
(Del. Ch. Apr. 20, 2012).
439
AB Value Partners, LP v. Kreisler Mfg. Corp., No. 10434-VCP, 2014 WL
7150465, at *5 (Del. Ch. Dec. 16, 2014).
440
In re Xerox Corp. Consol. S’holder Litig., 76 N.Y.S.3d 759 (Sup. Ct. 2018), rev’d
on other grounds sub nom. Deason v. Fujifilm Holdings Corp., 86 N.Y.S.3d 28 (1st
Dep’t 2018).
441
BlackRock Credit Allocation Income Tr. v. Saba Capital Master Fund, Ltd., 2224
A.3d 964, 980 (Del. 2020).
442
See DEL. CODE ANN. tit. 8, § 211(d).
443
Id. § 211(c).
444
See Licht v. Storage Tech. Corp., C.A. No. 524-N, 2005 WL 1252355 (Del. Ch.
May 13, 2005) (holding that, as a default matter, when the shareholders of a corporation
vote on matters other than the election of directors (and barring the application of a more
specific voting standard under another Delaware statute), abstentions are properly
counted as negative votes).
-226-
445
See, e.g., Allen v. Prime Comput., Inc., 540 A.2d 417 (Del. 1988); Edelman v.
Authorized Distribution Network, Inc., C.A. No. 11104, 1989 WL 133625 (Del. Ch. Nov.
3, 1989); Nomad Acquisition Corp. v. Damon Corp., C.A. Nos. 10173, 10189, 1988 WL
383667 (Del. Ch. Sept. 20, 1988).
446
See, e.g., Allen , 540 A.2d 417; Edelman, 1989 WL 133625; Nomad Acquisition
Corp., 1988 WL 383667; Plaza Sec. Co. v. O’Kelley, C.A. No. 7932, 1985 WL 11539
(Del. Ch. Mar. 5, 1985), aff’d sub nom, Datapoint Corp. v. Plaza Sec. Co., 496 A.2d
1031 (Del. 1985).
447
Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988).
448
See, e.g., Kidsco Inc. v. Dinsmore, 674 A.2d 483 (Del. Ch.), aff’d, 670 A.2d 1338
(Del. 1995); Stahl v. Apple Bancorp, Inc., C.A. No. 11510, 1990 WL 114222 (Del. Ch.
Aug. 9, 1990).
449
Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch.
2013).
450
Id. at 950.
451
Id. at 953 (referring to Moran v. Household Int’l, Inc., 500 A.2d 1346 (Del.
1985)).
452
DEL. CODE ANN. tit. 8, § 115.
453
City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229 (Del. Ch.
2014).
454
E.g., In re CytRX Corp. Stockholder Derivative Litig., No. CV-14-6414, 2015 WL
9871275 (C.D. Cal. Oct. 30, 2015); Order, Brewerton v. Oplink Commc’ns, Inc., No.
RG14-750111, 2014 WL 10920491 (Cal. Super. Ct. Dec. 12, 2014); Order, Groen v.
Safeway, Inc., No. RG14-716651, 2014 WL 3405752 (Cal. Super. Ct. May 14, 2014);
Order, Miller v. Beam, Inc., No. 2014 CH 00932, 2014 WL 2727089 (Ill. Ch. Ct. Mar. 5,
2014); Order, Genoud v. Edgen Grp., Inc., No. 625,244, 2014 WL 2782221 (La. Dist. Ct.
Jan. 17, 2014); Order, Collins v. Santoro, No. 154140/2014, 2014 WL 5872604 (N.Y.
Sup. Ct. Nov. 10, 2014); Order, HEMG Inc. v. Aspen Univ., C.A. No. 650457/13, 2013
WL 5958388 (N.Y. Sup. Ct. Nov. 14, 2013); North v. McNamara, 47 F. Supp. 3d 635
(S.D. Ohio 2014); Roberts v. TriQuint Semiconductor, Inc., 358 Or. 413, 415 (2015) (en
banc); see also City of Providence v. First Citizens BancShares, 99 A.3d 229 (Del. Ch.
2014) (enforcing a North Carolina forum-selection bylaw).
-227-
455
Order, Centene Corp. v. Elstein, C.A. No. 11589-VCL, 2015 WL 5897988 (Del.
Ch. Oct. 8, 2015); Telephonic Hr’g on Pl.’s Mot. For Expedited Proceedings & for TRO
& Rulings of the Ct., Edgen Grp. Inc. v. Genoud, C.A. No. 9055-VCL, 2013 WL
6409517 (Del. Ch. Nov. 5, 2013).
456
Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020).
457
ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014).
458
Id. at 558.
459
DEL. CODE ANN. tit. 8, § 102(f); DEL. CODE ANN. tit. 8, § 109(b).
460
Solak v. Sarowitz, C.A. No. 12299-CB, 2016 WL 7468070 (Del. Ch. Dec. 27,
2016).
461
See, e.g., Moore Corp. v. Wallace Comput. Servs. Inc., 907 F. Supp. 1545 (D.
Del. 1995); Buckhorn, Inc. v. Ropak Corp., 656 F. Supp. 209 (S.D. Ohio 1987), aff’d,
815 F.2d 76 (6th Cir. 1987).
462
See, e.g., In re Walt Disney Co. Derivative Litig., 731 A.2d 342 (Del. Ch. 1998),
aff’d in part, rev’d in part sub nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000); Grimes
v. Donald, 673 A.2d 1207 (Del. 1996); Worth v. Huntington Bancshares, Inc., 540
N.E.2d 249 (Ohio 1989).
463
San Antonio Fire & Police Pension Fund v. Amylin Pharm., Inc., 983 A.2d 304
(Del. Ch. 2009), aff’d, 981 A.2d 1173 (Del. 2009).
464
Id. at 315.
465
Id. at 316 n.37.
466
Kallick v. SandRidge Energy, Inc., 68 A.3d 242 (Del. Ch. 2013).
467
Id. at 260.
468
Id. at 255-60.
469
Id. at 264.
470
Tr. of Oral Arg. on Defs.’ Mots. to Dismiss and Rulings of the Ct. at 70, Pontiac
Gen. Emps. Ret. Sys. v. Ballantine, No. 9789-VCL, 2014 WL 6388645 (Del. Ch. Oct. 14,
2014).
-228-
471
Id. at 13-15.
472
Id. at 72-73.
473
Id. at 74; see Carmody v. Toll Bros., 723 A.2d 1180 (Del. Ch. 1998).
474
Tr. of Oral Arg. on Defs.’ Mots. to Dismiss and Rulings of the Ct. at 78-79,
Pontiac, 2014 WL 6388645.
475
See, e.g., Arnaud van der Gracht de Rommerswael v. Speese, No. 4:17-cv-227,
2017 WL 4545929 (E.D. Tex. Oct. 10, 2017) (denying motion to dismiss breach of
fiduciary duty claims against directors who approved a proxy put provision where the
complaint alleged that the board (a) did not obtain extra consideration from lenders for
including the provision, (b) could have obtained the financing without the provision, and
(c) should have known the provision’s risks); Gilbert v. Abercrombie & Fitch, Co., No.
2:15-cv-2854, 2016 WL 4159682 (S.D. Ohio Aug. 5, 2016) (settlement of breach of
fiduciary duty claims against directors who had approved dead hand proxy puts included
(a) removal of the proxy put provisions, (b) a $167,000 payment to class counsel but no
payment to the class, and (c) resolutions requiring board approval for any future debt
instruments that contain dead hand proxy puts).
476
Tr. of Telephonic Bench Ruling of the Ct. on Pl.’s Application for an Order to
Dismiss the Action as Moot and for an Award of Attorneys’ Fees and Expenses at 8, Fire
& Police Pension Fund, San Antonio v. Stanzione, C.A. No. 10078-VCG, 2015 WL
1359410 (Del. Ch. Feb. 25, 2015).
477
Basic Inc. v. Levinson, 485 U.S. 224, 239 (1988); see also, TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 439 (1976) (setting forth the basic test for materiality
under the securities laws).
478
Basic, 485 U.S. at 239-41.
479
Targets only must disclose a potential transaction if (i) such disclosure is
affirmatively required by SEC rules, (ii) the target or a corporate insider desires to trade
on the basis of material non-public information (the “disclose or abstain rule”), or
(iii) disclosure is required to make prior statements not misleading. Vladimir v.
Bioenvision Inc., 606 F. Supp.2d 473, 484-85 (S.D.N.Y. 2009), aff’d Thesling v.
Bioenvision, Inc., 374 Fed.App. 141 (2d Cir. 2010); SEC v. Tex. Gulf Sulphur, 401 F.2d
833, 848 (2d Cir. 1968); see also Exchange Act Rule 14e-3 (prohibiting trading in the
context of tender offers on the basis of material non-public information). Disclosure is
only required by SEC rules in limited situations and Item 1.01 of Form 8-K does not
require disclosure of mergers until a formal agreement is signed. Further, the SEC staff
takes the position that although Item 303 of Regulation S-K could be read to require
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companies to address pending talks as “likely to have material effects on future financial
condition or results of operations,” where disclosure is not otherwise required, a
company’s management’s discussion and analysis need not contain a discussion of the
impact of negotiations where inclusion of such information would jeopardize the
completion of the transaction. Management’s Discussion and Analysis of Financial
Condition and Results of Operations; Certain Investment Company Disclosures, SEC
Release No. 33-6835 (May 18, 1989); 17 C.F.R. §229.303.
480
“The duty of a corporation and its officers to disclose is limited. To that end, ‘a
corporation is not required to disclose a fact merely because a reasonable investor would
very much like to know that fact. Rather an omission is actionable under the securities
laws only when the corporation is subject to a duty to disclose the omitted facts.’”
Vladimir, 606 F. Supp.2d at 484 (quoting In re Time Warner Inc. Sec. Litig., 9 F.3d 259,
267 (2d Cir. 1993)); see also, Basic, 485 U.S. at 239 n. 17.
481
Emps. Ret. Sys. of R.I. v. Williams Cos., 889 F.3rd 1153, 1168 (10th Cir. 2018).
482
However, the NYSE takes the position that “[n]egotiations leading to mergers and
acquisitions . . . are the type of developments where the risk of untimely and inadvertent
disclosure of corporate plans are most likely to occur. . . . If unusual market activity
should arise, the company should be prepared to make an immediate public
announcement of the matter. . . . A sound corporate disclosure policy is essential to the
maintenance of a fair and orderly securities market. It should minimize the occasions
where the [NYSE] finds it necessary to temporarily halt trading in a security due to
information leaks or rumors in connection with significant corporate transactions.” NYSE
Listed Company Manual, Rule 202.01. Similarly, Nasdaq imposes a duty on listed
companies to promptly disclose, except in unusual circumstances, any material
information which would reasonably be expected to affect the value of their securities or
influence investors’ decisions. Nasdaq Stock Market Rules, Rule 5250(b)(1). Nasdaq
defines unusual circumstances as, among other things, “where it is possible to maintain
confidentiality of those events and immediate public disclosure would prejudice the
ability of the Company to pursue its legitimate corporate objectives.” Nasdaq Stock
Market Rules, Rule IM 5250-1.
483
See, e.g., In re MCI Worldcom, Inc. Sec. Litig., 93 F. Supp.2d 276, 280 (E.D.N.Y.
2000) (concluding that a disclosure duty arose only after the company affirmatively
denied merger negotiations); In re Columbia Sec. Litig., 747 F. Supp. 237, 243 (S.D.N.Y.
1990) (concluding that the plaintiff sufficiently pled that affirmative denial of merger
negotiations during ongoing merger negotiations was materially misleading).
484
In the Matter of Carnation Co., SEC Release No. 34-22214 (July 8, 1985).
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485
Eisenstadt v. Centel Corp., 113 F.3d 738, 744 (7th Cir. 1997) (“Obviously a
corporation has no duty to correct rumors planted by third parties.”); Carnation Co., SEC
Release No. 34-22214. Additionally, there may be a duty to make corrective disclosure
where there is evidence that market rumors stem from trading by insiders in the
company’s shares. In re Sharon Steel Corp., SEC Release No. 34-18271 (Nov. 19,
1981).
486
State Teachers Ret. Bd. v. Fluor, 654 F.2d 843, 850 (2d Cir. 1981); see also,
Eisenstadt, 113 F.3d at 744; In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 265 (2d Cir.
1993); Holstein v. Armstrong, 751 F. Supp. 746, 747 (N.D. Ill. 1990).
487
The test of whether a leak or rumor is attributable to an issuer mirrors the test for
whether a company is liable for analyst statements and forecasts—that is, whether the
company has “sufficiently entangled” itself with the disclosure of information giving rise
to the rumor. “Sufficient entanglement” can occur either explicitly by leaking
information or implicitly if the company reviews information and represents that it is
accurate or comports with the company’s views. Elkind v. Liggett & Myers, Inc., 635
F.2d 156, 162-63 (2d Cir. 1980).
488
Fluor, 654 F.2d 843.
489
Id. at 846-49.
490
Id. at 851.
491
For example, Nasdaq notes that “Whenever unusual market activity takes place in
a Nasdaq Company’s securities, the Company normally should determine whether there
is material information or news which should be disclosed. If rumors or unusual market
activity indicate that information on impending developments has become known to the
investing public, or if information from a source other than the Company becomes known
to the investing public, a clear public announcement may be required as to the state of
negotiations or development of Company plans. Such an announcement may be required,
even though the Company may not have previously been advised of such information or
the matter has not yet been presented to the Company’s Board of Directors for
consideration. In certain circumstances, it may also be appropriate to publicly deny false
or inaccurate rumors, which are likely to have, or have had, an effect on the trading in its
securities or would likely have an influence on investment decisions.” Nasdaq Stock
Market Rule, Rule IM 5250-1. See also supra note 479.
492
Moore Corp. v. Wallace Comput. Servs. Inc., 907 F. Supp. 1545, 1558, 1560 (D.
Del. 1995).
493
Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Ch. 2011).
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494
See Allergan, Inc. v. Valeant Pharm. Int’l, Inc., No. SACV 14–1214 DOC(ANx),
2014 WL 5604539 (C.D. Cal. Nov. 4, 2014).
495
The technique of a white squire defense combined with a self-tender offer at
market or a slight premium to market was used defensively by Diamond Shamrock and
Phillips-Van Heusen in 1987. In neither of those instances, however, did the would-be
acquiror challenge the defense. In 1989, the Delaware Court of Chancery upheld the
issuance of convertible preferred stock by Polaroid Corporation to Corporate Partners in
the face of an all-cash, all-shares tender offer, marks the most significant legal test of the
white squire defense. See Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 278
(Del. Ch. 1989). The Polaroid decision confirmed the prevailing line of cases upholding
the issuance of stock to a white squire as a defensive measure when the result was not to
consolidate voting control in management or employee hands.
496
See 17 CFR § 240.14d-101, Item 7 of Schedule 14D (calling for disclosure
pursuant to, among other items, Item 1006(d)).
497
Moran v. Household Int’l, Inc., 500 A.2d 1346, 1350 n.6 (Del. 1985).
498
In re AbbVie Stockholder Derivative Litig., Cons. C.A. No. 9983-VCG, 2015 WL
4464505 (Del. Ch. July 21, 2015).
499
Order, Depomed Inc. v. Horizon Pharma, PLC, No. 1-15-CV-283834, 2015 WL
7433326 (Cal. Super. Ct. Nov. 19, 2015).
500
John S. McCain National Defense Authorization Act for Fiscal Year 2019, H.R.
5515, 115th Cong. (2018).
501
See Wachtell, Lipton, Rosen & Katz, Comment Letter to SEC (July 24, 2008),
available at http://www.sec.gov/comments/s7-10-08/s71008-28.pdf (commenting that the
SEC’s proposed revisions, which ultimately were adopted substantially as proposed with
a few notable exceptions, should be revised to enact comprehensive reform, such as using
U.S. trading volume—and not beneficial ownership—as the relevant criterion for
determining the level of exemption; providing Tier I-style exemptive relief to Section
13(d) regulation under the Williams Act; and eliminating the use of “unconventional
tender offer” analysis in foreign transactions).
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